Upstate Estate Law, P.C. Blog

Next up in South Carolina Estate Lawyer A to Z, is the marital estate tax deduction. This is a deduction against the estate tax, and it results in significant tax savings when utilized correctly.

The marital deduction was first introduced in 1948 with the passage of a fifty percent marital deduction applicable to non-community property. In 1977, the marital deduction was changed to be the greater of $250,000.00 or fifty percent of the decedent’s estate, still applicable only to non-community property. In the Economic Recovery Tax Act (there seems to be a lot of these Recovery Acts doesn’t there?) of 1981, the marital deduction became unlimited and it was applied equally to separate and community property. This is where we stand at present with the marital deduction.

There are seven major requirements in order for a transfer to a spouse to qualify for the marital deduction. They are set forth in IRC Section 2056 and are:

• 1. The decedent must have been legally married at the time of death.
• 2. The person to whom the decedent was legal married must survive the decedent.
• 3. The surviving spouse must be a US citizen (or the property is held in a QDOT trust).
• 4. The interest passing to the surviving spouse is includible in the decedent’s gross estate
• 5. The interest must pass to the surviving spouse.
• 6. The interest received by the surviving spouse must be a deductible interest.
• 7. The value of the interest passing to the surviving spouse must be at its net value.

The fifth requirement is one of the more interesting, as it leads to the question of what qualifies as an interest that passes to the surviving spouse. Certainly, property acquired by will, intestacy, elective share, power of appointment, or beneficiary designation qualifies as passing to the surviving spouse. But what about transfers in trust where the surviving spouse only has an interest for life? Do these qualify for the marital deduction as property passing to a surviving spouse?

The rule has existed that terminable interests in property do not qualify for the marital deduction. The reasoning behind this is that while the government is willing to defer the estate taxes owed when the first spouse passes away, the government wants some assurance that it will eventually be paid when the surviving spouse passes away (the marital deduction can be seen more as a delay in the payment of estate taxes rather than a full avoidance of the tax). Property given to the spouse that is a terminable interest would circumvent this principle. Some examples of terminable interests are run-of-the-mill life estates and interests in trusts that fail to meet certain requirements.

What are the certain requirements that could result in a marital deduction being available for a terminable trust interest? Well that would be the QTIP trust (Qualified Terminable Interest Trust), and I will talk about that some more when I get to the letter Q.