The unlimited marital deduction: how it works and taxation.

What is an unlimited marital deduction? The unlimited marital deduction is a provision of the U.S. Inheritance and Gift Tax Act that allows an individual to transfer an unlimited amount of assets to his or her spouse at any time, including at the transferor's death, without incurring a tax burden.

The unlimited spousal deduction is an estate preservation tool because assets can be distributed to surviving spouses without paying inheritance or gift tax.

Main findings:

• The unlimited marital deduction allows spouses to transfer unlimited amounts of money to each other, including upon death, without''effective in 1982. The provision eliminates both the inheritance and gift taxes for transfers of property between spouses, treating them as one economic unit. This deduction was enacted by Congress to eliminate the problem of increased tax rates for inheritances due to inflation. Because the inheritance tax, like the income tax, is progressive, inheritances that increase with inflation are subject to higher tax rates. Due to the unlimited marital deduction, the amount of property that can be transferred between spouses is unlimited, meaning that a spouse can transfer all of his or her property to the other spouse during life or after death without paying inheritance tax or''spouse's taxable estate - unless it is spent or gifted during the surviving spouse's lifetime. Otherwise, if the surviving spouse remarries, the unlimited marital deduction may allow assets to pass to the new spouse free of inheritance and/or gift tax.

Qualified household trusts.

The unlimited marital deduction applies only to surviving spouses who are United States citizens. A qualified domestic trust' can be obtained for non-qualified spouses'(QDOT) to provide unlimited marital deductions. Receiving an inheritance through QDOT defers inheritance tax until the principal is distributed by a trustee who is a U.S. citizen or by a corporation that also withholds inheritance tax. Income from the principal distributed to the surviving spouse is taxed as individual income. After the surviving spouse becomes a U.S. citizen, the remaining QDOT principal can be distributed without further taxation.