Explain the Use of Marital Deduction in Estate Planning

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The Answer is The 1981 Economic Recovery Tax Act (ERTA) made it possible to entirely avoid estate taxes on the death of the first spouse. Property passing to a spouse is free from estate or gift tax because of an unlimited marital deduction. To qualify for the marital deduction, the property must be given to the spouse outright or by other legal arrangements that are equivalent to ownership in law. There is an exception in the case of income interests in charitable remainder annuity or unit trusts and in Qualified Terminable Interest Property (QTIP) for which the executor makes an election. If the spouse is made the unconditional beneficiary of life insurance proceeds with unrestricted control over any unpaid proceeds, life insurance proceeds will also qualify as marital deduction property.
Transfers between spouses are exempt both from estate and gift taxes. The unlimited marital deductions open up exciting ways for large estates to save on taxes, especially when the deduction is combined with the unified credit. However, for most families, estate planning is still necessary. While there is no estate tax when the property passes to the surviving spouse, estate taxes might very well be due when the property is transferred to the beneficiaries upon the death of the second spouse.

Explain the Use of Marital Deduction in Estate Planning

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