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Marital Deduction Trust and Will

A decedent’s estate receives a tax deduction for amounts passing to a surviving spouse. Such deductions are used to defer estate taxes and transfer taxes that would otherwise be due on the death of the first spouse to die until the time of death of the surviving spouse. To qualify for the tax deduction, strict compliance with one of the exceptions in Internal Revenue Code Setions 2056 and 2523 is required (the most important of which is the Qualified Terminable Interest Property exception in 2056(b)(7)).

There is no dollar limit on the amount of assets that may qualify for the marital deduction. However, an indiscriminate use of the marital deduction may result in compiling all of a deceased spouse’s assets in the estate of the survivor, thus possibly pushing the value of the surviving spouse’s estate over the estate tax limit at the time of his/her death (for 2011, any estate worth over $5 million is taxed at 35%). So, suppose a couple has an estate of $6 million in 2011 and the estate plan simply gives all the assets to the surviving spouse on the death of the first to die. Then the first spouse dies and $6 million goes to the other spouse. After the second spouse dies, $1 million would be subject to 35% of estate taxes (and possibly more if the generation skipping tax is in play).

On the other hand, it is sometimes wise to outright transfer all assets to a surviving spouse if there are minor children. The young, surviving spouse would probably need the funds on hand to raise the children.

In closing, it’s important to make sure that your specific estate plan takes advantage of the marital deduction. Not all arrangements will qualify for the deduction. Instead, things like joint tenancy property, tenancy by the entirety, property passing by will to the spouse, and trust arrangements are the only vehicles that can qualify for the deduction.

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