Most gifts or transfers to a spouse, regardless of
the amount, qualify for the marital deduction and pass to the spouse gift
and estate tax
free. Gifts that fully qualify for the marital deduction do not need to be
reported on a gift tax return. Transfers to a surviving spouse at death
must be reported but are generally fully deductible on the estate tax
return.
Transfers that Do Not Qualify for the
Deduction: The marital deduction is not an exclusion from gift tax or
estate.
Although property passing to a surviving spouse is not taxed at the death
of the first spouse, it is included in the taxable estate of the surviving
spouse. Property which will not be included in the gross estate of the
surviving spouse does not qualify for the marital deduction.
• Noncitizen: Gifts
to a noncitizen spouse do not qualify for the marital deduction. Such gifts
qualify for an annual exclusion of $100,000 if the gifts over $10,000
would qualify for the marital deduction if given to a citizen spouse. [IRC
§2523(i)]
Gifts to a noncitizen spouse are deductible
regardless of the amount if:
– Property passes to a Qualified Domestic
Trust subject to U.S. federal estate tax [IRC §2056A]; or
– Surviving spouse is a U.S. resident and becomes a U.S. citizen before
decedent’s IRS Form 706 is filed [IRC §2056(d)(4)]. The estate of a
surviving spouse who later becomes a U.S. citizen may be entitled to a
credit for tax paid by the first spouse’s estate.
• Terminable Interests: A
terminable interest is one that will end after a period of time or when a
contingency occurs or fails to occur (life estates, annuities, etc.). A
terminable interest is not deductible if the donor retained an interest or
gave another interest in the same property to someone other than the
spouse and that person may possess or enjoy the property after the spouse’s
interest terminates. [IRC §2523(b)(1), §2056(b)(1)]
Terminable Interests that Qualify for
the Marital Deduction: Terminable
interests that will be included in the gross estate of the surviving
spouse are deductible:
• Life Estate with Power of Appointment: (1)
spouse is entitled for life to all income paid at least annually, (2)
spouse alone has the power to appoint the entire interest to
himself/herself; and (3) no other person has power to appoint any part of
the interest to anyone else. [IRC §2523(e), §2056(b)(5)]
• Joint Tenancies & Tenancies by the
Entirety: If one spouse gives
property to the other by creating a joint tenancy or tenancy by the
entirety, the gift is not considered a terminable interest if the spouses
are the only tenants. [IRC §2523(d)]
• Qualified Terminable Interest Property
(Q-TIP): A donor may elect to treat
otherwise nondeductible property as Q-TIP property. Q-TIP property
qualifies for the marital deduction but, in exchange for this treatment,
the property must be included in the donee’s gross federal estate. The election
is made on the donor’s gift or federal estate tax return. The Q-TIP election is
used to shift property owned by one spouse to the taxable federal estate of the
other. It allows the donor spouse to apply both spouse’s unified credits
without giving the recipient spouse control of the property. Q-TIP
elections are most commonly used to provide for a surviving spouse while
passing property to children from a former marriage. Q-TIP treatment can
be elected for property if: (1) spouse is entitled for life to all income
paid at least annually, and (2) no one has a power to appoint any part of
the property to any person other than the spouse while the spouse is
living. [IRC §2523(f) and 2056(b)]
• Special Rule for Joint & Survivor
Annuities: A gift of an interest in
a joint and survivor annuity qualifies for the marital deduction as Q-TIP
property as long as no other person has the right to receive payments
under the contract while either spouse is alive. If a death benefit or
refund is paid after the death of the surviving annuitant, the payment is
included on the survivor’s estate tax return. This treatment is
automatic unless the donor elects otherwise on IRS Form 709. [IRC
§2523(f)(6)]
