What is the “Unlimited Marital Deduction?”

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Explain Unlimited Marital Deduction for Me

The definition of 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. The unlimited marital deduction is an estate preservation tool because assets can be distributed to surviving spouses without incurring estate or gift tax liabilities.

The federal unlimited marital deduction allows an individual to leave unlimited amounts of assets, free of federal estate tax, to his or her surviving spouse (as long as the surviving spouse is a U.S. citizen). This is accomplished through an unlimited deduction from estate and gift tax that postpones the tax on assets inherited from each other until the second spouse dies. Likewise, most state exempt transfers to a surviving spouse from state death tax.

A special provision called “portability” was made permanent in the 2013 tax law changes. This allows the person administering the estate of a deceased spouse to allocate any unused exemption amounts to the surviving spouse, thereby enabling the surviving spouse to transfer up to $10 .86 million (2015) to their beneficiaries tax-free.

To accomplish this, the administrator must file a federal estate tax return within 9 months of the death of the first spouse, even if no tax is owed. If the return is not filed, or the deadline (including a possible 6-month extension) is missed, the surviving spouse loses the right to portability.

The unlimited marital deduction is an estate tax provision that went into effect in 1982. The provision eliminated both the federal estate and gift tax on property transfers between spouses, treating them as one economic unit.2 The deduction was adopted by Congress to redress the problem of estates being pushed into higher tax brackets by inflation. Because the estate tax, like the income tax, is progressive, estates that grow with inflation are hit with higher tax rates.

With the unlimited marital deduction, the amount of property that can be transferred between spouses is unlimited, meaning that a spouse can transfer all of their property to the other spouse, during lifetime or at death, without incurring any federal estate or gift tax liabilities on this first transfer. The transfer is made possible through an unlimited deduction from estate and gift tax that postpones the transfer’s taxes on the property inherited from each other until the second spouse’s death.

In other words, the unlimited marital deduction allows married couples to delay the payment of estate taxes upon the first spouse’s death. After the surviving spouse dies, all assets in the estate over the applicable exclusion amount will be included in the survivor’s taxable estate.