What Is Unlimited Marital Deduction? How It Works and Taxation

What Is the Unlimited Marital Deduction?

The unlimited marital deduction is a provision in the U.S. Federal Estate and Gift Tax Law that allows an individual to transfer an unrestricted amount of assets to their spouse at any time, including at the death of the transferor, free from tax.

The unlimited marital deduction is an estate preservation tool because assets can be distributed to surviving spouses without incurring estate or gift tax liabilities.

Gifts made to non-spouse individuals or organizations are subject to IRS gifting limits, gift tax, and estate tax.

Understanding the Unlimited Marital Deduction

Taxation

The unlimited marital deduction is an estate tax provision that went into effect in 1982. The provision eliminated both the federal estate and gift tax on property transfers between spouses, treating them as one economic unit.

It allows for an unlimited amount of property to be transferred between spouses. This means that a spouse can transfer all of their property to the other spouse during their lifetime or after death without incurring any federal estate or gift tax liabilities on this first transfer.

The transfer is made possible by an unlimited deduction from estate and gift tax that postpones the taxes on the transferred property until the second spouse's death.

After the surviving spouse dies, all assets in the estate over the applicable exclusion amount will be included in the survivor's taxable estate.

The deduction was adopted by Congress to redress the problem of estates being pushed into higher tax brackets by inflation. Because the estate tax, like the income tax, is progressive, estates that grow with inflation are hit with higher tax rates.

For tax year 2024, financial gifts up to $18,000 can be made without incurring the gift tax. That's up from $17,000 for tax year 2023.

Special Considerations

Any asset transferred to a surviving spouse can be included in that spouse's taxable estate—unless it is spent or gifted during the surviving spouse's lifetime.

Alternatively, if the surviving spouse remarries, the unlimited marital deduction may allow the assets to pass to the new spouse without applying estate and/or gift taxes. In some situations, fewer taxes will be paid by using additional estate planning methods such as exemptions or trusts.

Qualified Domestic Trusts

The unlimited marital deduction applies only to surviving spouses that are U.S. citizens. A qualified domestic trust (QDOT) may be created to provide unlimited marital deductions for non-qualified spouses. A bequest through a QDOT defers estate tax until the principal is distributed by the trustee, a U.S. citizen, or a corporation that also withholds the estate tax.

Income on the principal distributed to the surviving spouse is taxed as individual income. After the surviving spouse becomes a U.S. citizen, the principal remaining in a QDOT may be distributed without further tax.

The Bottom Line

The unlimited marital deduction is an estate planning tool that allows someone before or after death to transfer assets to their spouse without incurring estate or gift taxes on the amount transferred.

This estate tax provision treats two spouses as one economic entity. It went into effect in 1982 due to an effort by Congress to deal with the financial burden that could result when estates were pushed into higher tax brackets.