Marital deduction

Key takeaway

The federal estate tax marital deduction reduces the taxable estate by the value of qualifying property interests included in the decedent’s gross estate and passing to a surviving spouse, subject to terminable interest and citizenship requirements.

For a family with a business, real estate or private investments, bring an ownership list and the documents describing what the spouse receives to the planning discussion.

Property transfers and deductible value

Property can pass through a will, inheritance, statutory spousal rights, a lifetime transfer, survivorship ownership, a power of appointment or life insurance when the relevant statutory description is met. The transfer route alone does not establish deductibility.

A qualifying interest is valued after accounting for death taxes affecting the spouse’s net interest, encumbrances and obligations imposed by the decedent.

Interests that can end

A terminable interest is one that can end through time, an event or a contingency. Subject to the exceptions below, the deduction is denied when both of these conditions apply:

An interest in the same property passes from the decedent to someone other than the spouse or the spouse’s estate for less than adequate and full consideration.
Because of that transfer, the other recipient or their heirs or assigns may possess or enjoy the property after the spouse’s interest ends.

A terminable interest is also disallowed if the executor or trustee is to acquire it for the spouse under the decedent’s directions, even when those two conditions do not apply.

The QTIP exception is defined under Related terms below. A separate exception concerns a life interest with a general power of appointment.

For that separate exception, the spouse must be entitled for life to all income from the entire interest or a specific fractional or percentage portion, payable at least annually.

The spouse must be able to appoint that entire interest or portion to themselves or their estate, acting alone and in all events, during life or by will.

No other person may appoint any part of that interest or portion to anyone other than the spouse.

Citizenship requirements

For a surviving spouse who is not a U.S. citizen, the deduction is unavailable unless the QDOT or citizenship exception applies.

The citizenship exception applies if the spouse becomes a U.S. citizen before the estate tax return is filed and was a U.S. resident continuously from the decedent’s death until becoming a citizen.

The QDOT exception is defined below. For treaty questions, open the cross border guide listed under Resources to check out.

Qualified terminable interest property (QTIP). QTIP is property passing from the decedent for which the executor irrevocably elects QTIP treatment on the estate tax return and the surviving spouse has a qualifying income interest for life. The spouse must receive all income at least annually, and no person may appoint the property to anyone else during the spouse’s life.

Qualified domestic trust (QDOT). A QDOT is a trust satisfying the federal statutory requirements for the estate tax marital deduction exception for a surviving spouse who is not a U.S. citizen. Property must pass in the QDOT, be transferred to it before the estate tax return is filed, or be irrevocably assigned to it on or before that filing date.

Resources to check out

Federal estate, gift and GST tax. Open this guide to put your marital deduction questions alongside the broader federal transfer tax topics before meeting with your adviser.
Cross border estate planning. The guide covers treaty-based marital deductions for a noncitizen spouse. Open it next if citizenship or connections to another country are part of your family’s planning discussion.
Federal transfer tax records and questions checklist. Use this checklist to organize the records and questions you want to bring to a discussion about the spouse’s property interests and estate reporting.
Asset and authority map template. Start here if your family’s business, real estate and investment ownership is scattered across several documents. Bring the completed map to the discussion about what each spouse owns and receives.

An ownership perspective

This speaker describes starting with a view of what each spouse owns, a useful focus for organizing your own planning conversation.

"The way we divide it up is you could see the patriarch, what the patriarch owns, what the matriarch owns, what's in probate, what's not, so that if one of them dies, how big of a probate mess we have? We have the type of assets they own."
From an Investor Advantage talk hosted by Richard C. Wilson

Common questions

Which schedule reports the estate tax marital deduction?

Schedule M must be completed and filed with Form 706 when the estate claims the marital deduction on Part V, item 21.

Does the marital deduction also apply to lifetime gifts?

Yes. An outright, nonterminable gift qualifies for a federal gift tax marital deduction equal to its value if the recipient is the donor’s spouse when the gift is made and is a U.S. citizen.

For a spouse who is not a U.S. citizen, the gift tax marital deduction is unavailable. A separate, indexed annual exclusion applies only to present interest gifts that would qualify for the marital deduction if the spouse were a citizen.

Does a short survival condition always prevent the deduction?

No. A survival condition can avoid terminable interest disallowance if termination upon the spouse’s death is confined to six months after the decedent’s death, a common disaster causing both deaths, or either event.

The termination or failure must not actually occur, and the other marital deduction requirements still apply.

Can the estate deduct the same property interest twice?

No. The same property interest cannot be deducted more than once for the same decedent, even under another estate tax deduction provision.

Sources

26 U.S.C. §2056: estate tax marital deduction, transfer routes, valuation, terminable interests, trust exceptions, citizenship and duplicate deductions.
26 U.S.C. §2056A: qualified domestic trust requirements.
26 U.S.C. §2523: lifetime gift tax marital deduction and citizenship restrictions.
IRS Instructions for Form 706: Schedule M filing requirement.

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