What Are the Rules for the Unlimited Marital Deduction?

The unlimited marital deduction is a feature of federal tax law that permits an individual to transfer an unrestricted amount of assets to their spouse without incurring federal gift or estate taxes. This provision allows for such transfers to occur at any point during the spouses’ lives or at the time of one spouse’s death. The purpose of this deduction is to treat a married couple as a single economic entity for tax purposes. This approach postpones tax liability until the death of the surviving spouse, whose estate is then taxed only if it exceeds the federal exemption amount, which for 2025 is $13.99 million per individual.

Core Requirements for the Deduction

For the unlimited marital deduction to apply, the individuals involved must be legally married at the time the gift is made or at the moment of the decedent’s death. The status of legal marriage is determined by the applicable state law.

A requirement for the standard unlimited marital deduction is that the spouse receiving the assets must be a U.S. citizen. This rule is in place to ensure that the assets remain within the U.S. tax jurisdiction.

The property in question must “pass” from one spouse to the other in a manner recognized by the Internal Revenue Service (IRS). Assets transferred through a will, a trust, joint ownership with rights of survivorship, or beneficiary designations on life insurance policies or retirement accounts all satisfy this requirement.

For the deduction to be claimed against the estate tax, the value of the property must first be included in the deceased spouse’s gross estate. The marital deduction is then subtracted from the total gross estate to determine the taxable estate.

Qualifying Property Interests

The most straightforward way to transfer assets and have them qualify for the unlimited marital deduction is through an outright transfer. This can be a direct gift of cash or property made during one’s lifetime. It can also be a simple bequest in a will, where assets are left directly to the surviving spouse without any strings attached.

A limitation on the marital deduction is the “terminable interest rule.” A terminable interest is a property right that will end or fail upon the lapse of time or the occurrence of some event. For example, if a will states, “I leave my house to my wife for her lifetime, and then to our children,” the wife’s interest is terminable because it ends upon her death. Such interests do not qualify for the marital deduction because the surviving spouse does not have ultimate control over the asset’s final destination.

The primary exception to this rule is the Qualified Terminable Interest Property (QTIP) trust. This trust structure allows a spouse to provide for their surviving partner for life while still controlling where the assets go after the survivor’s death. To qualify, the QTIP trust must pay all of its income to the surviving spouse at least annually for their entire life, and no one else can be a beneficiary of the trust during the surviving spouse’s lifetime. For a QTIP trust to receive the marital deduction, the executor of the deceased spouse’s estate must make a specific election on the federal estate tax return.

The Non-Citizen Spouse Exception

The rules for the unlimited marital deduction change when the surviving spouse is not a U.S. citizen. Gifts to a non-citizen spouse are subject to a special annual exclusion limit of $190,000 for 2025 before they begin to count against the donor’s lifetime gift tax exemption. This distinction is due to the concern that a non-citizen spouse could receive a large inheritance tax-free and then leave the United States, allowing the assets to potentially escape U.S. estate taxation. To address this issue while allowing for tax deferral, the tax code provides for a Qualified Domestic Trust (QDOT).

When assets are transferred to a properly structured QDOT for the benefit of a non-citizen spouse, the transfer can qualify for the marital deduction. For a trust to meet the requirements of a QDOT, at least one trustee must be a U.S. citizen or a U.S. domestic corporation. This U.S. trustee has the power to withhold estate tax from any distributions of principal made from the trust. For larger trusts, additional requirements may be imposed, such as requiring the U.S. trustee to be a bank or for the trust to be bonded to ensure tax payment.

The QDOT works by deferring the estate tax rather than eliminating it. Any distributions of the trust’s principal to the non-citizen spouse will trigger the estate tax. The tax is also levied on the value of the assets remaining in the QDOT upon the death of the non-citizen spouse.