Marital Deduction: The #1 Tool in Estate Tax Planning

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Paul Sundin, CPA

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The marital deduction is probably the most critical part of estate planning for married people. To qualify for the deduction, the interest that passes to the surviving spouse must be non-terminable.

So what is a terminable interest? This interest results when the decedent leaves property or assets to a surviving spouse for the spouse’s lifetime with a remainder interest to the decedent’s children. Any terminable interest will not qualify for the marital deduction.

Since this transfer results in the surviving spouse’s lifetime interest terminating upon death, it does not qualify for the marital deduction. But even though this does not qualify, it is not included in the surviving spouse is gross to state.

One exception to the terminable interest rule is property subject to a QTIP. A QTIP is property that the surviving spouse receives an income interest for life, and the executor Alex on the estate tax return to treat the property as a QTIP. However, the election is irrevocable.

So what is a qualifying income interest for life? It is an interest that has the following two components:

1) the surviving spouse is allowed to have all the income generated from the property itself. This can be paid annually or at monthly intervals.

2) no person can appoint any part of the property to any person other than the surviving spouse. However, a power that is excerpt exercisable at or after the surviving spouse’s death will not disqualify the income interest in the property.

Remember that if the decedent leaves property to a spouse designated for the spouse’s lifetime but has a remainder interest to the children, it does not qualify for the marital deduction. But the good news is that a QTIP does qualify for the marital deduction. The QTIP is included in the surviving spouse’s gross estate and is typically retained in a marital or QTIP trust.

How to maximize the marital deduction

Fortunately, married couples can always defer the estate tax until the death of the second spouse. This is because the estate tax marital deduction is unlimited.

So if one of the spouses has $100 million estate and dies, the marital deduction will allow all the assets to pass to the surviving spouse with no estate tax.

In addition, due to the portability of the unused exclusion amount, if the spouse of the decedent makes a portability election, the surviving spouse’s estate has to exceed twice the individual exclusion amount essentially before any estate tax is assessed. So the surviving spouse would have an estate tax limit of 22 million.

Marable deduction example

So let’s look at an example. Let’s assume that A and B represent a married couple who have a tax basis of $6 million and $9 million, respectively.

Let’s also assume that both A and B die in the same calendar year. Assuming that their wills leave all assets to the surviving spouse, it does not matter who passes away first because there is no estate tax on the assets of the first person to die thanks to the unlimited marital deduction.

In addition, none of the $11 million exclusion amount would be used. Thanks to the marital deduction, the tax base is reduced to zero.

When the surviving spouse passes away, the resulting estate tax would be calculated as shown below:

Gross estate tax base equals $15 million.

The basic exclusion amount is 11.4 million.

Unused spouses exclusion is 11.4 million.

The Net estate tax liability is calculated based on the 40% rate.

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Estate CPA

Gilbert, AZ