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The Marital Deduction
The marital deduction plays an
important role in both gift and
estate tax. Everything you give or
leave your spouse in a qualified form is deductible (and
potentially taxable in your spouse's estate). The effect is to
enable tax-free transfer among parents -- with a price collected
from the children.
The key words are "qualified
form".
Anything you leave or give your
spouse outright will qualify. This will apply to the fractional
share of joint tenancies if your spouse can sever them.
The complication comes with
trusts, which many people want to provide for their spouses.
If you establish a trust which,
upon your spouse's death, will pass to someone other than your
spouse's estate, it is a terminable interest. It will not qualify
for the marital deduction unless it meets certain criteria.
It must pay all income to your
spouse.
Your spouse must have the
power to require the trustee to convert unproductive property
to productive property.
Pre-1981, your spouse had to
have the power to either withdraw principal or to name their
estate as a beneficiary after death (a
general power of appointment). Either of such powers would
make the trust includible in the spouse's estate.
1981 tax revisions introduced
the Qualified Terminable Interest Property (QTIP). If the
executor of your estate *elects* to claim the marital deduction
for a trust which otherwise qualifies, even without the power
to withdraw or general power of appointment, it is deductible.
And if the executor does so, even if not otherwise includible
in your spouse's estate, it will be included.
If the math of the first
estate makes it desirable, the executor can elect to deduct only
a portion of the trust -- e.g. 72.731%. In that case, 72.731% of
the trust value at your spouse's death will be includible.
Furthermore, if the trust
provides for payments of principal to your spouse, it can be
drafted to have those payments charged against the includible
portion of the trust.
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