The Federal Estate Tax Marital Deduction

One of the primary deductions from the federal estate tax is the marital deduction. Does utilization of this deduction avoid the federal estate tax? For a while, although you may wind up significantly increasing the total estate tax payable on your spouse’s death.

You can pass all your property – in whatever form or amount – to your spouse (as long as that spouse is a U.S. citizen), completely free of any federal estate tax. This is called the “unlimited marital deduction”. However, the property that has passed must still be included in the decedent’s gross estate in order for the deduction to apply. If the gross estate does not include the transfers to the spouse, no marital deduction applies.

Although this seems to be a tempting planning strategy, it can be a double-edged sword:

(1) the assets you have left tax-free to your spouse are all taxed when your spouse later dies – at higher brackets. Your surviving spouse would have to remarry and give his/her entire estate to the new spouse in order to get another unlimited marital deduction. Most people would rather have their children or other relatives benefit from the estate, rather than a new spouse and his/her family.

(2) you waste your exemption by leaving all to your spouse. To avoid this result, consider (1) giving the exempt amount to your children and the balance to your spouse or (2) placing up to the current exemption amount in a trust for the benefit of the surviving spouse. (In estate-planning lingo, this trust is often called a by-pass trust, a family trust, a credit shelter trust, or an A/ B trust. This type of arrangement can provide for the health and support of your survivor but its assets are not included in the survivor’s federal estate when she or he dies later.)