Thursday April 25, 2024

1.2.5 Marital Deduction

Marital Deduction

Qualified Terminable Interest Property (QTIP) Trusts:  A QTIP trust may be created during life or, more commonly, in an estate plan.

Unitrusts, Annuity Trusts and Gift Annuities:  Marital gift deductions are available for charitable remainder annuity trusts, unitrusts or charitable gift annuities.

Since 1981, there has been an unlimited marital deduction. Sec. 2523(a). This unlimited marital deduction allows free transfer of assets between spouses. This free transfer is very helpful in balancing estate sizes to make full use of the available exemption equivalent in each estate.

The actual transfer of title to property is determined under state law. In some states, it is possible to create joint tenancy, community property or separate property by a simple written agreement, dated and signed by both spouses.

The unlimited marital deduction is available for citizen spouses. For non-citizens, the first $100,000 (indexed for inflation) may be transferred without tax. Sec. 2523(i). In 2024, $185,000 is exempt from taxation. Gifts in excess of this amount will require use of the exemption equivalent.

Qualified Terminable Interest Property (QTIP) Trusts

A QTIP trust may be created during life or, more commonly, in an estate plan. Sec. 2523(f). A QTIP trust requires that all income be distributed to the spouse and that a power of invasion exist only for the benefit of the spouse. When the spouse passes away, the remainder is distributed according to the trust instrument.

The most common use of a QTIP trust is to protect the children of the marriage or of a prior marriage. If assets were transferred outright to a spouse and he or she remarried, the assets might be eventually distributed to other family members, unrelated to the first decedent spouse. Thus, the QTIP makes certain that the children or other beneficiaries intended by the first spouse will eventually benefit from the trust principal.

The QTIP trust also could be used to benefit charities. The QTIP trust could pay income, and if necessary, principal to the spouse. The remainder of the trust could then be distributed to one or more charities.

Unitrusts, Annuity Trusts and Gift Annuities

Marital gift deductions are available for charitable remainder annuity trusts, unitrusts or charitable gift annuities. The charitable remainder unitrust or annuity trust must benefit only the spouse, with the remainder to qualified charities. Sec. 2523(g). Similarly, the gift annuity must be a one-life annuity for the spouse. Sec. 2523(f)(6).

Private Letter Rulings

PLR 201112001 QTIP Election is Null and Void:   Decedent created a living trust. Upon his death, the trust was divided into a marital trust and a family trust. The marital trust was funded with as much of the taxable estate as necessary to eliminate the estate tax from decedent's estate.
PLR 201118007 Severance and Partial Gift of QTIP Trust:   Decedent created a marital trust with the net income to be paid to Spouse for life. Any remaining assets are distributed to Decedent's then-living issue as appointed by Spouse. If Spouse does not exercise this limited power of appointment, each share will be distributed to Decedent's then living children or their issue if deceased.
PLR 201242002 IRS Allows Trust Severance, Reverse QTIP Election:   Decedent died, survived by Spouse, Son and grandchildren. Article IV of Decedent's will provided that upon her death the residue of the estate should pass to Trust.

PLR 201832003 QTIP Election Extension Granted:   Decedent passed away leaving Surviving Spouse. Decedent's residuary estate passed to Trust, including various assets and an IRA, with Surviving Spouse as beneficiary.

PLR 9244013 QDOT and Unitrust:   Taxpayer desired to create a charitable remainder unitrust (CRUT) for himself and his spouse. However, his spouse was not a U.S. citizen and therefore did not qualify for the Sec. 2056(b)(8) marital deduction. Taxpayer planned to fund the CRUT with separate property and retain a testamentary right of revocation. The CRUT included the required provisions for a qualified domestic trust (QDOT) under Sec. 2056A(a).

Related Topics on Marital Deduction

1.3.4  Marital Deduction:    Since 1981, there has been an unlimited marital deduction. Individuals who are married may transfer any assets outright to a surviving spouse, with the entire transfer qualifying for a marital deduction. Since it is desirable to preserve the value of the applicable exclusion amount for the first spouse to pass away in a bypass or family trust, a common plan is to fund a bypass trust to the maximum amount and transfer the balance of the estate outright or in trust to the surviving spouse.
3.1.10  Income, Gift, Estate and GSTT:    The donor to a charitable remainder annuity trust will receive an income tax deduction equal to the present value of the remainder interest. It is calculated using the applicable federal rate for the current month or one of the prior two months, as permitted under Sec. 7520.

3.10.9  Income, Gift, Estate and Generation-Skipping Transfer Taxes:    The donor to a charitable remainder unitrust will receive an income tax deduction equal to the present value of the remainder interest. It is calculated using the applicable federal rate for the current month or one of the prior two months, as permitted under Sec. 7520.

3.3.9  Income, Gift and Estate Taxes:    The major benefits of a charitable gift annuity are an income tax charitable deduction and partly tax-free payments. Reg. 1.1011-2(a). In addition, if the donor/annuitant passes away prior to his or her life expectancy, the unrecovered basis may be deducted on the final income tax return as a miscellaneous itemized deduction not subject to the 2% limit. Sec. 72(b)(3) and Sec.67(b)(10).

Windsor:    In Edith Schlain Windsor v. United States; No. 1:10-cv-08435(6 Jun 2012), the District Court of the Southern District of New York permitted qualification for an estate tax marital deduction.


Kite:    In Estate of Virginia V. Kite et al. v. Commissioner; T.C. Memo. 2013-43; Nos. 6772-08, 6773-08, (7 Feb 2013), the Tax Court held that termination of a QTIP trust was a taxable gift.


Wells Fargo:    Decedent Mary Kate Nielsen funded several gifts during her lifetime. These gifts exceeded her available annual gift exclusions and required the use of part of her lifetime gift exemption. Mrs. Nielsen also funded a QTIP trust for her spouse John T. Nielsen with an amount of $550,000.

      Quiz-Basic



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