What the unlimited marital deduction does

The marital deduction is a federal estate-tax deduction for qualifying property passing from a decedent to a surviving spouse. The “unlimited” description means there is generally no dollar cap on the qualifying deduction when both spouses are U.S. citizens. It can shift the timing of estate tax, but it is not a separate lifetime exemption that permanently removes property from transfer-tax calculations.

What happens at the first death

If qualifying property passes to the surviving spouse, the estate can generally deduct that property on Schedule M of Form 706. The deduction reduces the taxable estate of the first spouse. Depending on the estate and elections, this can leave the first spouse's basic exclusion unused rather than applying it to the transfer to the spouse.

Why this is usually deferral

Property owned by the surviving spouse at death is generally considered in that spouse's gross estate. As a result, an outright transfer may postpone estate tax until the second death rather than make the property disappear from the system. The survivor's own exclusion, lifetime gifts, asset growth, spending, and estate plan then affect the later result.

Portability is a separate election

The marital deduction and portability solve different problems. Portability can transfer a deceased spouse's unused exclusion (DSUE) to the survivor when the executor makes a timely election on Form 706. A marital deduction alone does not automatically file that return or preserve the unused exclusion. The executor must consider the filing and election requirements even when no estate tax is due at the first death.

QTIP property can qualify

A qualified terminable interest property (QTIP) election can preserve a marital deduction when a trust gives the surviving spouse a qualifying income interest for life while the first spouse controls who receives the remaining property. If the election is made, the QTIP property is generally included in the surviving spouse's gross estate later. The deduction at the first death therefore does not normally end the transfer-tax story.

A surviving spouse who is not a U.S. citizen

The unlimited marital deduction generally is not available for property passing to a noncitizen surviving spouse. A qualified domestic trust (QDOT) can qualify the transfer for the deduction if the statutory and regulatory requirements are met. Estate tax may then apply to certain QDOT distributions or when the surviving spouse dies.

Simple example

A U.S.-citizen decedent leaves qualifying property outright to a U.S.-citizen spouse. The first estate may claim the marital deduction, potentially leaving the first spouse's exclusion unused. If the executor also wants portability, a timely Form 706 election is still needed. When the survivor later dies, assets still owned by the survivor may be included in that estate.

Exam traps

• Calling the deduction a tax-free gift during life; it is an estate-tax deduction for qualifying transfers.
• Assuming the marital deduction and portability are the same rule.
• Assuming qualifying property is permanently excluded from the surviving spouse's estate.
• Forgetting the QDOT rule for a noncitizen surviving spouse.
• Treating every interest passing to a spouse as deductible without checking terminable-interest rules or elections.

Key takeaway

The marital deduction can reduce tax at the first death and often defer tax until the survivor's death. Portability, QTIP planning, citizenship, and the property ultimately owned by the survivor remain separate considerations.