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                                   The Marital Deduction


For both gift tax (IRC Sec. 2523) and estate tax (IRC See. 2056) purposes, a deduction is allowed for the value of gifts between spouses.

The deduction is unlimited; i.e., 100% of qualified transfers such as the following:

A. Outright gifts or bequests

B. Gifts or bequests in trust
1.    General power of appointment trust: Spouse has the right to all income plus the right to say during life and/or at death who receives the remaining principal.
2.    Revocable trust:' Spouse has right to all income and to revoke or amend the trust at any time in his or her favor.
3.    Estate trust: Income accumulates during surviving spouse's lifetime. Spouse has the right to say at death (by will) who gets the accumulated income and
principal.
4.    Qualified terminable interest property (QTIP) trust: Spouse has the right to all income during life. No one else can benefit from the principal, but the
donor (or decedent) can direct who will get the principal at the surviving spouse's later demise.
5.    Qualified domestic trust: If the surviving spouse is not a U.S. citizen, the marital deduction will not be allowed unless the assets pass to a qualified domestic trust which meets four conditions:
a.    The trust requires at least one U.S. trustee (unless waived by the IRS) who approves all distributions.
b.    Spouse must have an interest which would otherwise qualify for the marital deduction if he or she were a citizen.
c.    Must meet Treasury requirements designed to ensure collection of tax at surviving spouse's demise.
d.    Executor makes irrevocable election on federal estate tax return to defer the tax.

A noncitizen spouse who becomes a U.S. citizen before the estate tax return is filed and was a resident from the decedent's death through the filing of the return is eligible for the marital deduction.

Any distributions of principal will be taxed at the same rate as if they were included in the decedent's estate.



At death, the trust becomes irrevocable. The surviving spouse has as much (or as little) flexibility as provided for by the grantor.