What Is the Marital Deduction and How Does It Work?

The marital deduction is a provision within the U.S. federal estate and gift tax system. It allows married individuals to transfer assets to their U.S. citizen spouse without incurring federal estate or gift tax. This recognizes spouses as a single economic unit for tax purposes, deferring tax obligations until assets pass outside the marital unit.

The Marital Deduction Explained

The marital deduction permits an unlimited amount of assets to be transferred between spouses without triggering immediate federal gift or estate tax liability. This applies whether the transfer occurs during the spouses’ lifetimes as a gift or at death through an inheritance. A spouse can transfer their entire estate or any portion of it to their U.S. citizen spouse without federal tax due at that time.

This deduction defers the payment of transfer taxes. While assets pass tax-free to the surviving spouse, they become part of that spouse’s taxable estate, potentially subject to estate tax upon their subsequent death or gift tax upon their future transfer to others. This deferral prevents the erosion of family wealth through taxation at the first spouse’s death, allowing the surviving spouse full access to combined assets. Internal Revenue Code Section 2056 governs this deduction.

Conditions for Qualification

For a transfer to qualify for the marital deduction, specific conditions must be met, ensuring the property is ultimately subject to taxation when it leaves the marital unit. The property must pass directly from the decedent or donor to their legally recognized spouse. This means the recipient must be the surviving spouse for estate tax purposes or the donee spouse for gift tax purposes.

For estate tax purposes, the property transferred must have been included in the decedent’s gross estate. This ensures that only property subject to federal estate tax can then be deducted through the marital deduction. A key requirement involves the nature of the interest transferred, particularly due to the “terminable interest rule.”

Generally, an interest in property that will terminate or fail upon the occurrence or non-occurrence of an event, or after a period of time, will not qualify for the marital deduction. An example is a life estate, where a spouse receives income from property for their lifetime, but the property itself passes to someone else upon their death. This prevents the property from being included in the surviving spouse’s estate, thus avoiding taxation at their death.

However, there are exceptions to this terminable interest rule that allow certain interests to qualify for the deduction. A Qualified Terminable Interest Property (QTIP) trust is a common exception. With a QTIP trust, the surviving spouse must be entitled to all the income from the property for their life, payable at least annually. No one else can receive any of the principal during the surviving spouse’s lifetime. An executor or donor must elect for the property to be treated as QTIP on the relevant tax return.

Another exception involves a life estate with a general power of appointment. Here, the surviving spouse receives a life estate in the property and also holds a general power to appoint the principal to themselves, their estate, or their creditors. This power ensures the property is includable in the surviving spouse’s estate, satisfying the underlying policy of the marital deduction. An estate trust is a third exception where income can be accumulated or paid to the spouse, and upon the spouse’s death, the remaining principal and accumulated income are distributed to their estate.

A final exception to the terminable interest rule applies when the transfer is conditioned on the spouse surviving for a limited period, typically not exceeding six months. If the surviving spouse dies within this period due to a common disaster or other specified condition, the interest may not pass to them. However, if the spouse survives the stipulated period, the interest qualifies for the marital deduction. This provision addresses situations where both spouses might die around the same time.

Marital Deduction for Non-Citizen Spouses

Special rules apply to the marital deduction when the surviving or donee spouse is not a U.S. citizen. The unlimited marital deduction generally does not apply in these situations because the U.S. tax system seeks to ensure that transferred assets will eventually be subject to U.S. estate tax. Without this limitation, a non-citizen spouse could receive unlimited assets tax-free and then leave the U.S., avoiding any future U.S. estate tax on those assets.

Despite this general rule, an increased annual gift tax exclusion is available for gifts to non-citizen spouses. For example, in 2025, a U.S. citizen can gift up to $190,000 to a non-citizen spouse without incurring gift tax. This amount is significantly higher than the standard annual gift tax exclusion for gifts to non-spouses, allowing for substantial tax-free transfers over time.

For estate tax purposes, the mechanism to qualify for the marital deduction when the surviving spouse is not a U.S. citizen is through a Qualified Domestic Trust (QDOT). Assets placed into a QDOT can qualify for the marital deduction, deferring estate tax until distributions of principal are made from the trust or upon the non-citizen spouse’s death. The QDOT ensures that the property remains within the U.S. tax system’s reach.

To qualify as a QDOT, specific requirements must be met. At least one trustee of the QDOT must be a U.S. citizen or a U.S. domestic corporation. This trustee is responsible for withholding the estate tax from any distributions of principal made to the non-citizen spouse. The trust instrument must also include provisions to ensure the collection of the deferred estate tax, such as requiring a U.S. bank as a trustee or a bond or letter of credit if the trust assets exceed a certain value, often $2 million.

The deferred estate tax is imposed on principal distributions from the QDOT during the non-citizen spouse’s lifetime and on the value of the trust assets remaining at the spouse’s death. If the non-citizen spouse later becomes a U.S. citizen and certain conditions are met, the QDOT may no longer be necessary. The remaining assets can then potentially pass free of the deferred estate tax.