What Is the Marital Deduction for Estate Tax?

The marital deduction is a provision in United States tax law allowing an individual to transfer an unlimited amount of assets to their spouse without incurring federal estate or gift tax. Its primary function is not to eliminate the estate tax but to defer it. The tax liability is postponed until the death of the surviving spouse, at which point the assets are included in their estate.

This strategy is relevant for individuals with assets exceeding the federal estate tax exemption, which is $13.99 million per person for 2025. Transferring assets to a spouse reduces an estate’s taxable value, allowing the surviving spouse full use of the assets during their lifetime. The principle treats the married couple as a single economic unit, providing significant financial flexibility.

Qualifying for the Marital Deduction

For a transfer to be eligible for the marital deduction, several conditions must be met. The first requirement is that the asset being transferred must be included in the deceased spouse’s gross estate. The transfer must “pass” to the surviving spouse, a term that includes methods like a will, trust, joint ownership with right of survivorship, or as a named beneficiary on an account.

A fundamental requirement is that the surviving spouse must be a U.S. citizen at the time of the decedent’s death. Specific arrangements are available for non-citizen spouses, which are addressed in the next section.

A significant limitation on the marital deduction is the terminable interest rule. A terminable interest is a property right that will end or fail after a certain period or upon a specific event, with the property then passing to a third party. For example, if a will states, “I leave the income from my investment portfolio to my spouse for 15 years, and after 15 years, the portfolio itself goes to my child,” this creates a terminable interest.

Such interests do not qualify for the marital deduction because the surviving spouse does not have full control over the ultimate disposition of the property. The logic behind this rule is to ensure that property that escapes taxation in the first estate is taxable in the second. If the spouse’s interest is temporary, the asset would not be included in their gross estate upon death. There are, however, important exceptions to this rule, primarily involving specific types of trusts.

The Qualified Domestic Trust for Non-Citizen Spouses

When the surviving spouse is not a U.S. citizen, the marital deduction is disallowed. The government’s concern is that a non-citizen spouse could receive a large inheritance tax-free, leave the United States, and pass those assets to their heirs without being subject to U.S. estate tax. This would convert the tax deferral into permanent tax avoidance.

To address this, the tax code allows for the use of a Qualified Domestic Trust (QDOT). By transferring assets to a properly structured QDOT, the estate of the first-to-die spouse can claim the marital deduction, deferring the estate tax while ensuring the U.S. Treasury can eventually collect it.

For a trust to meet the QDOT requirements, it must adhere to specific rules. At least one trustee must be a U.S. citizen or a U.S. bank. This U.S. trustee must have the authority to withhold estate tax from any distributions of principal made from the trust to the non-citizen surviving spouse. The trust must also include provisions that ensure the collection of the tax.

The tax implications of a QDOT are precise. While the surviving spouse can receive all income from the trust without triggering an estate tax, any distributions of principal are subject to the tax, calculated as if it were part of the first spouse’s estate. The remaining assets in the QDOT are then taxed upon the death of the surviving non-citizen spouse. If the surviving spouse becomes a U.S. citizen, they may be able to receive the remaining trust principal without this tax being imposed.

Structuring Transfers to Use the Deduction

There are several methods for transferring assets to a spouse to ensure they qualify for the marital deduction. The simplest approach is an outright transfer. This involves giving property directly to the surviving spouse through a will, beneficiary designation, or joint title, with no conditions. The spouse receives full ownership and control, and the transfer qualifies for the deduction.

A more structured approach involves using a marital trust, which can provide asset management and control over the property’s final disposition. One such vehicle is a General Power of Appointment (POA) trust. Under this arrangement, assets are placed in a trust for the benefit of the surviving spouse, who is entitled to receive all income from the trust for life. The spouse must also be granted a “general power of appointment,” which gives them the unrestricted authority to name who will receive the trust assets upon their own death.

The most widely used marital trust is the Qualified Terminable Interest Property (QTIP) trust, which is an exception to the terminable interest rule. A QTIP trust allows a decedent to provide for their surviving spouse while retaining control over who ultimately inherits the assets. The primary requirements are that the surviving spouse must be entitled to all income from the trust, paid at least annually, for their entire life, and no one else can be a beneficiary during the surviving spouse’s lifetime.

Unlike a POA trust, with a QTIP trust, the first spouse to die designates in the trust document who will receive the remaining assets after the surviving spouse passes away. This feature is useful in situations involving blended families. To secure the marital deduction, the executor of the deceased spouse’s estate must make a formal QTIP election on the federal estate tax return.

Portability of the Unused Estate Tax Exemption

A related concept is the portability of the Deceased Spousal Unused Exclusion (DSUE). Portability is the rule that allows a surviving spouse to use any portion of their deceased spouse’s federal estate tax exemption that was not used by the deceased’s estate. This provision allows a married couple to combine their individual exemptions, shielding more assets from federal estate tax.

The value of portability is clear in common estate plans. For instance, a spouse might leave their entire estate to the surviving spouse, using the unlimited marital deduction. In this scenario, the deceased spouse’s estate tax exemption would go unused. Portability allows this unused exemption to be transferred to the surviving spouse, who can add it to their own exemption.

Securing this benefit requires a specific action, as portability is not automatic. The executor of the estate of the first spouse to die must file a federal estate tax return and make the portability election on that return. This filing is required even if the estate owes no tax and would otherwise not be required to file a return.

Failing to file a timely estate tax return to elect portability results in the permanent loss of the deceased spouse’s unused exemption. This can be a costly oversight, potentially exposing the surviving spouse’s estate to a significant tax liability that could have been avoided.