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.
- The unlimited marital deduction allows spouses to transfer an unlimited amount of money to one another, including upon death, without penalty or tax.
- Gifts made to other non-spouse individuals or organizations are subject to IRS gifting limits and estate tax.
- Any asset transferred to a surviving spouse can be included in the spouse's taxable estate.
- The limit on non-taxable gifts under the rules is $16,000 per individual and the estate tax exemption is $12.06 million for 2022.
- The amounts increase to $17,000 and $12.92 million in 2023.
Understanding the Unlimited Marital Deduction
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. 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.
With the unlimited marital deduction, the amount of property that can be transferred between spouses is unlimited, meaning that a spouse can transfer all of their property to the other spouse during their lifetime or at death without incurring any federal estate or gift tax liabilities on this first transfer.
The transfer is made possible through an unlimited deduction from estate and gift tax that postpones the transfer's taxes on the property inherited from each other until the second spouse's death. In other words, the unlimited marital deduction allows married couples to delay the payment of estate taxes upon the first 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 IRS exemption for estate and gifts is $12.06 million for the 2022 tax year and $12.92 million for 2023.
Any asset transferred to a surviving spouse can be included in the 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 United States citizens. A qualified domestic trust (QDOT) may be obtained 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.