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Estate planning involves various strategies to minimize taxes and ensure that your assets are distributed according to your wishes. One powerful tool available to married couples is the marital deduction. Understanding how the marital deduction works can help you make informed decisions and maximize the benefits for your surviving spouse. Here are nine important things to know about the marital deduction.
1. Definition of Marital Deduction
The marital deduction is a provision in U.S. tax law that allows an individual to transfer an unlimited amount of assets to their spouse upon death without incurring federal estate taxes. This deduction is designed to provide financial security for the surviving spouse by deferring estate taxes until their death.
2. Unlimited Deduction
One of the most significant benefits of the marital deduction is that it is unlimited. This means there is no cap on the amount of assets that can be transferred to a surviving spouse tax-free, regardless of the size of the estate.
3. Eligibility Requirements
To qualify for the marital deduction, certain criteria must be met:
- Legal Marriage: The decedent and the surviving spouse must be legally married at the time of death.
- U.S. Citizenship: The surviving spouse must be a U.S. citizen. Non-citizen spouses can still benefit from the marital deduction through the use of a Qualified Domestic Trust (QDOT).
4. Qualified Domestic Trust (QDOT)
For non-citizen spouses, a QDOT can be established to allow the estate to take advantage of the marital deduction. The QDOT ensures that estate taxes are deferred until the non-citizen spouse’s death, at which point the remaining assets in the trust are subject to estate tax.
5. Deferral of Estate Taxes
The primary advantage of the marital deduction is the deferral of estate taxes until the death of the surviving spouse. This deferral allows the surviving spouse to use the entire estate to maintain their standard of living without the immediate burden of estate taxes.
6. Portability of Estate Tax Exemption
Portability allows the surviving spouse to inherit any unused portion of the deceased spouse’s federal estate tax exemption. For 2024, the federal estate tax exemption is $12.92 million per individual. If the deceased spouse did not use their entire exemption, the unused portion can be transferred to the surviving spouse, potentially doubling the exemption available to the surviving spouse’s estate.
7. Use with Other Estate Planning Tools
The marital deduction can be effectively combined with other estate planning strategies to maximize tax savings and asset protection:
- Credit Shelter Trusts (CSTs): Also known as bypass trusts, CSTs can be used to take advantage of the deceased spouse’s estate tax exemption while deferring taxes on the remaining assets through the marital deduction.
- Qualified Terminable Interest Property (QTIP) Trusts: These trusts allow the decedent to control the ultimate disposition of the assets while providing income to the surviving spouse. The assets in the QTIP trust qualify for the marital deduction.
8. Control Over Asset Distribution
Using the marital deduction, particularly through trusts, allows the deceased spouse to maintain some control over how the assets are distributed after the surviving spouse’s death. This can be beneficial in blended families or situations where the deceased spouse wants to ensure certain beneficiaries receive specific assets.
9. Considerations and Potential Pitfalls
While the marital deduction offers significant benefits, there are some considerations to keep in mind:
- Future Tax Liability: The deferral of estate taxes means that the surviving spouse’s estate could face a substantial tax liability upon their death, especially if the estate has grown significantly.
- Complexity: Setting up trusts and other estate planning tools to maximize the benefits of the marital deduction can be complex and requires professional guidance.
- Changing Laws: Estate tax laws can change, and what is beneficial under current law may not be as advantageous in the future. It’s important to regularly review and update your estate plan with a qualified attorney.
