Unlimited Marital Deduction

Definition

The Unlimited Marital Deduction is a provision in the U.S. Federal Estate and Gift Tax law that allows an individual to transfer an unlimited amount of assets to their spouse, free from tax, during their lifetime or at death. Generally, it defers the tax on the property transferred until the death of the spouse to whom property was transferred. This tax provision is aimed at eliminating the burden of marital estate tax.

Phonetic

The phonetic spelling of “Unlimited Marital Deduction” is:ʌnˈlɪmɪtɪd mæˈriːtəl dɪˈdʌkʃɨn

Key Takeaways

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1. The Unlimited Marital Deduction is a provision in the U.S. Federal estate and gift tax law that allows an individual to transfer an unrestricted amount of assets to their spouse at any time, including at the death of the transferor, free from tax.
2. This deduction is only available to spouses who are both U.S. citizens. If the recipient spouse is not a U.S. citizen, the transferor might need to pay estate taxes immediately.
3. The Unlimited Marital Deduction defer estate taxes until the second spouse dies. Any assets left will then be subject to estate taxes, which can be significant if the assets exceed the estate tax exemption amount.

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Importance

The Unlimited Marital Deduction is a crucial concept in finance and estate planning due to its substantial impact on tax liability. This deduction allows for the unlimited transfer of assets from one spouse to another without incurring federal estate and gift taxes, regardless of the amount. This can drastically reduce, or even eliminate the estate tax that might otherwise be due upon death. By appropriately utilizing the unlimited marital deduction, a couple can effectively double the amount of wealth that can pass to their heirs free from federal estate taxes, thereby ensuring a larger portion of their wealth is preserved for their loved ones. It forms a key tool in estate planning, optimizing wealth transfer, and minimizing tax liabilities.

Explanation

The purpose of the Unlimited Marital Deduction is to provide financial relief and ease the tax burden on married couples, especially in regards to the transfer of assets after one spouse’s death. Specifically within estate taxes, it serves to allow a spouse to transfer an unrestricted amount of assets to the other spouse during life or at death without incurring federal and state tax consequences. This provision is used in estate planning strategies to protect assets within a family and delay the payment of any estate tax until the death of the second spouse. Consequently, the surviving spouse has full use of the assets while they are still alive. If properly structured, this can ensure the surviving spouse’s financial security and protect the bulk of the estate for eventual distribution to the couple’s heirs.

Examples

The unlimited marital deduction refers to the provision in the U.S. Federal estate and gift tax law that allows an individual to transfer an unrestricted amount of assets to their spouse, during life or death, without incurring gift or estate tax. Here are three real-world examples.1. Mr. and Mrs. Smith: Mr. Smith is a successful businessman who has a net worth of $15 million. If he dies, his estate would be subject to estate tax once it exceeds the exclusion limit. However, Mr. Smith bequeaths his entire estate to Mrs. Smith. Due to the Unlimited Marital Deduction, Mrs. Smith will not owe any estate tax on the $15 million she inherits from him.2. Mr. and Mrs. Green: Mr. Green owns a valuable piece of real estate worth $2 million, aside from other assets. Before his death, he transfers this property ownership to his wife, Mrs. Green, to ensure she has a stable financial future. This asset transfer doesn’t incur any gift tax because of the Unlimited Marital Deduction.3. Mr. and Mrs. Johnson: Mr. Johnson, an art collector, anticipates the future value of his art collection, which is currently worth $10 million. In order to avoid his wife paying a massive estate tax upon his demise, he transfers ownership of his collection to her while he’s still alive. This gift won’t be subject to taxes thanks to the Unlimited Marital Deduction.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Gift tax exemption
• Estate tax
• Marital trust (A-B Trust)
• Inheritance
• Spousal benefits

Sources for More Information

• Investopedia
• Internal Revenue Service (IRS)
• Nolo
• Forbes