In DC, the marital deduction is a federal tax concept that does not eliminate estate taxes, but rather defers the payment of estate taxes until the death of the surviving spouse. The marital deduction, as a general rule, allows unlimited transfers between spouses during the spouse’s lifetime or at death to pass, free of estate tax. However, the intention is that those assets will be taxed at the death of the surviving spouse. To further understand how this rule may impact your estate, contact a DC trusts and estates lawyer today.
Purpose of the Marital Deduction Rule
The marital deduction rule is not aimed at eliminating estate tax on marital assets. The purpose of the marital deduction rule in DC is to defer the payment of estate tax until the death of the surviving spouse. For example, if a couple were married and the husband died and at the husband’s death, his co-taxable estate was $2 million and his will stated that his assets will be distributed to his wife outright and free of trust, then the wife would inherit $2 million at the death of her husband and at the death of the husband, there will be no estate tax due because all of the assets pass to the surviving spouse.
However, if at the surviving spouse’s death, she still owned that $2 million, then her estate may be subject to estate taxes for anything over the current state estate tax deduction and for decedents dying in 2016. For example, the DC estate tax exemption is a million dollars.
Rules of Transfer in DC
A trust and estate attorney can draft documents during the estate planning phase to ensure that the marital deduction is optimized for a married couple’s estate plan. The marital deduction is just one tool that is used to minimize exposure to estate taxes and it’s just one type of estate tax planning. An attorney can review a married couple’s assets and their citizenship, and determine whether taking or using a marital deduction would be beneficial for overall estate tax liability.
For a transfer to be made and to be considered eligible for the marital deduction, the parties must be legally married at the time that the distribution is made. Generally speaking, the marital deduction is invoked either during the lifetime of the donor, when gifts are made between spouses and after the death of the donor when assets pass by a will or trust to the surviving spouse.
Spouse Who Is a US Citizen
The donee spouse must be a US citizen. The bequest must not be an interest in property that may terminate during the spouse’s lifetime upon the passage of time or upon the occurrence or non-occurrence of some event with distribution, thereafter, to another person.
The interest must be includable and the decedent’s gross estate, unless passed to the surviving spouse entailed to the property, must pass from one spouse to the other spouse.
Spouse Who Is Not a Citizen
If the second spouse to die is a non-US citizen, then no estate tax marital deduction is permissible without the use of a qualified domestic trust. The idea of a qualified domestic trust is that, again, it is not a concept that allows for the elimination of estate tax, rather it defers the payment of estate tax to the death of the non-citizen surviving spouse.
Unlimited Deductible Transfers
In order for spouses to enjoy unlimited lifetime gifts, the gift must be made by one spouse during his or her lifetime to the other spouse. The parties must be married at the time that the gift is made. The donee must be a US citizen. The gift of bequest must not be an interest on property that they terminate during the spouse’s lifetime upon the occurrence or non-occurrence of an event or upon the passage of time; entitlement from the property must actually pass from one spouse to the other spouse.
Jointly Owned Assets
Generally, when both spouses are US citizens, the general rule is that the surviving spouse inherits 50% of the value of the joint tenancy, so if a married couple – both being US citizens – owned a house jointly that was worth a hundred thousand dollars, then it would be considered that one spouse already owned 50% of the joint tenancy, so $50,000, and at the death of the first spouse, the surviving spouse would inherit the other $50,000 from the surviving spouse.
When the surviving spouse is a non-US citizen, that rule is not the same and instead, there is an issue of consideration and contribution from the US-citizen; where the contribution cannot be proven. When this happens one hundred percent of the assets is deemed to have been inherited by the non-US citizen.
A trust and estate attorney can review the assets and the ownership of the assets for non-US citizens and can determine what options are available for a couple to save or defer the estate taxes. In addition, usually, an estate and trust attorney will work along with an attorney in the country where the non-US citizen is a resident to ensure that there is a smooth transfer of worldwide assets.
Transfers and Trusts
There are several transfers and trusts that qualify for the marital deduction, but in essence, transfers and a trust can qualify for the marital deduction if the income, from all of the specific portion of the trust, is payable to the surviving spouse – released annually – for a lifetime.
During the surviving spouse’s lifetime, no person other than the spouse is the beneficiary of the trust, but if the surviving spouse has a lifetime or testamentary general power of appointment and a power of appointment over a specific portion of the trust, property must be expressed as a fraction or percentage of the total trust rather than a pecuniary sum.
There are a couple of general categories of trust that qualify for a marital deduction which includes a power of appointment trust, an estate trust, a qualified terminal interest property trust, known more commonly as a QTIP.
There are several different ways that distributions qualify for a marital deduction. An outright distribution of property to the surviving spouse for the spouse to use during his or her lifetime is one example of such a distribution.