What Is Estate Tax Marital Deduction and How Does It Work?

The estate tax marital deduction is a provision in the estate tax that allows a married couple to transfer assets to each other without having to pay estate taxes on them. 

This provision is available to couples who are married at the time of the owner’s death.

There can be no divorce or annulment pending at the time of death. The Internal Revenue Service (IRS) allows this provision because it is thought that spouses should be allowed to provide for each other.

Also called the unlimited marital deduction, the estate tax marital deduction is unlimited. This means that a married couple can transfer an unlimited amount of assets to each other without paying estate taxes on them.

How Does It Work?

The estate tax marital deduction works by allowing a married couple to transfer assets to each other without having to pay estate taxes on them. Their assets are usually combined and taxed under the estate tax when a married couple dies. 

However, this is not the case if they have used the estate tax marital deduction. In order to take advantage of the estate tax marital deduction, a married couple must transfer assets to each other during their lifetime. 

The couple can do this by creating a joint will or trust or by simply transferring assets to each other.

The assets that are transferred between spouses are not taxed when they are transferred. However, if the spouse listed as the beneficiary on a life insurance policy is not the same spouse who transfers assets to them, these assets can be taxed. 

In order to avoid this tax, couples should list each other as beneficiaries on any policies they own.

Qualifications for the Estate Tax Marital Deduction

To be able to transfer assets without having to pay estate tax on them, a few conditions must be met.

A couple’s assets must be combined at the time of death. 

This means that they must hold their assets jointly or in some other type of tenancy that combines these assets and makes them one estate. 

If they don’t combine their assets and instead hold them as separate estates, then the estate tax marital deduction will not apply.

The couple must be married at the time of death. 

If they are divorced or have had their marriage annulled, they will not qualify for the estate tax marital deduction.

There can be no pending divorce or annulment when the spouse dies. 

This is to prevent spouses from getting divorced in order to take advantage of the estate tax marital deduction.

The spouse must be a U.S. citizen or resident at the time of death. 

If the non-U.S. citizen spouse dies, they will not qualify for the estate tax marital deduction. However, a spouse can use the qualified domestic trust (QDOT), which applies the marital deduction to assets placed in the trust. A non-citizen spouse can then access this.

The estate must be subject to estate taxes. 

If it is not, the estate tax marital deduction will not apply.

The estate must pass to the surviving spouse. 

If the couple has children from a previous relationship, then those children will receive any property or assets that are left behind in the estate.

Benefits of Using Estate Tax Marital Deduction in Your Estate Plan

There are many benefits to using a marital deduction in your estate plan. 

Avoid Double Taxation

One of these benefits is that you can avoid double taxation. If the couple had not used a marital deduction, then their estate would have been taxed twice. Once when they pass on and again when the children inherit their property.

Protection From Creditors

Because this type of estate tax deduction transfers property between spouses, creditors will not be able to touch it. It gives people peace of mind and the ability to plan for their future without having to worry about debt collectors.

Reduces Inheritance Costs

A third benefit is that transferring assets between spouses reduces inheritance costs. When you transfer your property or assets to another party after your death, then you are required to pay estate taxes on the value of those assets. 

However, if you transfer those assets to your spouse, then you will not have to pay these taxes. This can save your loved ones a lot of money and help them avoid unnecessary expenses.

More Assets for Your Loved Ones

The final benefit of using a marital deduction in your estate plan is that it allows you to pass more assets on to your loved ones. 

Because you are not taxed when you transfer assets to your spouse, you can transfer more of them without having to worry about the tax consequences. 

This can be especially helpful for people who have a large estate and want to ensure that their loved ones receive as much of it as possible.

Takeaways

The marital deduction in an estate plan allows spouses to transfer assets between themselves without having to pay any taxes. 

A few conditions must be met, such as combining their assets and both being U.S. citizens when one spouse dies. 

If these conditions are not met, then the estate tax marital deduction will not apply in your case, and you should look into other ways to reduce your estate taxes.

Consider working with a financial advisor and attorney to make sure that the marital deduction applies in your case and you are able to plan your estate as effectively as possible.

Estate Tax Marital Deduction FAQs

The estate tax marital deduction allows married couples to transfer property or assets between each other without being taxed for it.
This tax deduction only applies to married couples. They must combine their assets, including real estate, bank accounts, stocks, etc., and then transfer them to the surviving spouse in order for this provision to apply. The most important thing is that both spouses are U.S. citizens or residents at the time of death.
You must be married and meet all of the conditions in order to qualify for this provision. You cannot use this if you are single, divorced, or in a common-law marriage. It also does not apply if you are not a U.S. citizen at the time of death.
There are several benefits to using a marital deduction in your estate plan. These include avoiding double taxation, creditor protection, and reduced inheritance costs.
The marital deduction still applies as long as you are considered married under state law.

Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.