Marital Deduction Planning

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The unified gift and estate tax structure permits an unlimited marital deduction for transfers of property between spouses. Thus, when both spouses are living, they are free to transfer ownership of property between them as they see fit, without any gift tax. Likewise, the unlimited marital deduction effectively allows the first spouse to die to leave his or her entire estate to the surviving spouse, with no estate tax liability, regardless of the size of his or her estate. 

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QTIP Trust Advantages

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A QTIP trust can be a testamentary trust (created in the decedent's will) or a continuing trust built into the decedent's revocable trust. Either way a QTIP trust is designed to provide a life income interest to the surviving spouse with a direction that trust assets may not be used for anyone other than the surviving spouse during the surviving spouse's lifetime.

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Before 1982, an individual was required to make an outright bequest to a spouse in order for the gifted property to qualify for the unlimited marital deduction. Thus, the  individual was forced to make a difficult choice between utilizing the marital deduction to preserve estate assets and running the risk of those assets ending up in the hands of a surviving spouse's new family in the event of remarriage.

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QTIP trusts allow the first spouse to die to control the ultimate disposition of his or her property after the death of the surviving spouse. QTIP trusts are often used for this purpose. This is especially common when the spouses have been previously married and have children from prior marriages (so-called Blended Families).

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See also: Wealth Transfer Taxes (in 6 minutes)