Marital Deduction
Estate planningGlossary term
Definition
A provision in federal estate and gift tax law that allows an unlimited amount of assets to be transferred between spouses without incurring estate or gift taxes. The marital deduction effectively defers estate taxation until the death of the surviving spouse, at which point the combined estate may be subject to tax. Proper estate planning often combines the marital deduction with trusts like bypass trusts and QTIP trusts to maximize the total amount shielded from estate taxes.
Related terms
- Estate TaxA federal or state tax imposed on the transfer of a deceased person's assets to their heirs, calculated based on the total value of the estate above a certain exemption threshold. As of recent years, the federal estate tax exemption is quite high, meaning most estates do not owe federal estate tax, though some states impose their own estate taxes with lower thresholds. Proper estate planning using trusts and other strategies can help reduce or eliminate estate tax liability.
- Gift TaxA federal tax applied when someone transfers money or property to another person without receiving something of equal value in return, above the annual exclusion amount set by the IRS. The annual gift tax exclusion allows individuals to give a certain amount per recipient per year without triggering any tax reporting requirements. Gifts above the annual exclusion count against your lifetime estate and gift tax exemption.
- QTIP TrustA Qualified Terminable Interest Property trust that allows a surviving spouse to receive income from the trust assets during their lifetime while the deceased spouse's estate retains control over who ultimately inherits the principal. QTIP trusts qualify for the marital deduction, meaning no estate tax is due when assets transfer into the trust at the first spouse's death. They are particularly useful in blended families where one spouse wants to provide for the surviving spouse while ensuring the remaining assets eventually pass to children from a prior marriage.
- Bypass TrustA trust commonly used in estate planning for married couples that allows the first spouse to die to pass assets up to the estate tax exemption amount into a trust for the benefit of the surviving spouse, while keeping those assets out of the surviving spouse's taxable estate. Also known as a credit shelter trust or family trust, it effectively doubles the amount of wealth that can pass to heirs free of estate tax. The surviving spouse can typically receive income and principal from the trust during their lifetime.
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