Marital Deduction Definition and Legal Meaning
On this page, you'll find the legal definition and meaning of Marital Deduction, written in plain English, along with examples of how it is used.
What is Marital Deduction?
(n) Marital Deduction is the provision contained in the estate duty permitting the surviving spouse to get 50% deduction on the estate duty on the estate value of the deceased person.
History and Meaning of Marital Deduction
The Marital Deduction provision has been a part of the estate tax law in the United States since the early 1900s. Its aim was to ensure that a deceased person's assets were transferred to their surviving spouse with minimal tax liability. Essentially, the Marital Deduction allows a spouse to inherit unlimited assets from their deceased partner without paying any estate tax on the transferred wealth. The surviving partner's estate, however, will be taxed when they pass away.
In the past, the Marital Deduction has been used as a tax planning tool for high-net-worth families, as it permitted the deferment of estate taxes until the death of the surviving spouse. However, in later years, the tax laws have been adjusted to diminish this planning technique.
Examples of Marital Deduction
Here are some examples that demonstrate the use of the Marital Deduction provision:
-
Dave passes away and leaves all his assets, worth $10 million, to his wife Sarah. Because of the Marital Deduction provision, no estate taxes are owed on the transfer of these assets.
-
Jane's husband dies and leaves her a significant share of his estate, including a house and investments worth $5 million. Jane is not required to pay the estate tax on these assets under the Marital Deduction provision.
-
Bill and Emily decide to create a joint living trust to handle their assets. When Bill dies, the assets in the joint trust pass to Emily without any estate tax obligation thanks to the Marital Deduction.
Legal Terms Similar to Marital Deduction
Some other legal terms that relate to the Marital Deduction provision are:
-
Portability: This refers to the ability to transfer a deceased spouse's unused estate and gift tax exclusion to their surviving spouse, essentially increasing the tax exemption for the surviving spouse.
-
Unified Credit: This credit offsets gift and estate taxes when a person transfers wealth. The unified credit is calculated by subtracting the applicable credits resulting in a reduction of the tax liability.
-
Trusts: Trusts, such as credit shelter trusts and QTIP trusts, can be used alongside the Marital Deduction to accomplish a variety of estate tax planning goals.