The Unlimited Marital Deduction and Your Taxes

How the Unlimited Marital Deduction Can Benefit Your Estate

Bride and groom holding hands and kissing.
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It can pay to tie the knot—at least according to the Internal Revenue Service. The IRS offers an unlimited marital deduction that allows married couples to make unlimited inter-spousal transfers of property without incurring a tax, either during their lifetimes or after their deaths. The deduction applies to both estate taxes and gift taxes. 

Citizenship and the Unlimited Marital Deduction 

All U.S. residents can take the unlimited marital deduction for property transferred to a spouse who is also a U.S. citizen, but the rules change for non-citizen spouses. 

The deduction is not allowed if the spouse of the person making the gift is not a U.S. citizen. Instead, the gifting spouse can give their partner up to $164,000 for tax year 2022, up from $159,000 in tax year 2021 without incurring gift tax consequences.

The annual exclusion for one spouse gifting to another spouse who is not a U.S. citizen is indexed for inflation, so it will go up periodically to keep pace with the economy. 

Other Rules on the Unlimited Marital Deduction 

The unlimited marital deduction is only available until the second spouse dies. If they do not spend or deplete it during their lifetime, the value of the estate may be subject to estate taxes as they pass the property on to their own heirs. If they give the money or property to anyone other than a spouse, they may incur a gift tax.

A surviving spouse can share the unlimited marital deduction with their new spouse, however, if they remarry. They could inherit from the first spouse and gift or leave the property to the second spouse without taxation, but it would be taxed if it were left to other beneficiaries, such as children. 

The estate and gift tax lifetime exemption is $12.06 million for tax year 2022. That amount is per person, so for spouses, that's $12.06 million each. Property passed over this amount to most individuals or entities other than a spouse is subject to either an estate or gift tax. The IRS also has an annual gift tax exclusion amount, which is $16,000 for tax year 2022. Spouses can give away this much per person per year during their lifetime up to the lifetime exclusion amount without incurring a gift tax, regardless of the marital deduction.

The Unlimited Marital Deduction and Living Trusts

All this can require some intricate estate planning because certain living trusts can dodge the usual rules.

If a decedent leaves any property for the benefit of their surviving non-citizen spouse in a properly drafted Qualified Domestic Trust (QDOT), it will qualify for the deduction.

Property passing into other types of trusts created by one spouse for the benefit of the other also qualifies for the unlimited marital deduction. These include a marital deduction trust or a qualified terminable interest property trust, sometimes called a QTIP trust. This is the "A" Trust in an AB trust plan. Inter vivos qualified terminable interest property trusts, sometimes called inter vivos QTIP trusts, also qualify. These are created for the benefit of a spouse during the other spouse's lifetime.

State Level Estate Taxes and Unlimited Marital Deductions

States that collect an estate tax of their own also allow for unlimited marital deductions. In states that allow for a state-only QTIP election through the use of an ABC Trust plan, the "A" trust and the "C" trust are QTIP trusts that qualify for the state unlimited marital deduction.

Key Takeaways

  • The unlimited marital deduction allows spouses to give each other property and/or money throughout their lifetimes without having to pay a gift or estate tax.
  • If the receiving spouse is not a U.S. citizen, there is an annual exclusion that limits the amount they can receive per year before needing to file a gift or estate tax return.
  • Some states also offer an unlimited marital deduction.
  • There are other rules to know, so consider working with a estate planning attorney and/or a tax professional to ensure you understand all of the details when it comes to the unlimited marital deduction.

Frequently Asked Questions (FAQs)

What is the unlimited marital deduction?

The unlimited marital deduction is a rule that allows spouses (as long as both are U.S. citizens) to make an unlimited number of gifts to one another throughout their lifetime without incurring gift or estate taxes.

In what year did the unlimited marital deduction go into effect?

The unlimited marital deduction went into effect in 1982. Prior to that, a marital deduction as only allowed for "transfers of property in which the decedent’s surviving spouse had a terminable interest."

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