By taking advantage of the marital deduction, unlimited amounts of property can be passed between spouses, during lifetime or at death, and free of gift taxes and estate taxes. However, the marital deduction is generally not allowed if the property represents a terminable interest (i.e., an ownership right that will come to an end after a period of time or upon the occurrence of some specified event in the future).
Generally, in order to qualify for the marital deduction, property must pass in a manner that would cause it to be included in the surviving spouse's estate. In theory, this affords a delay in estate taxation, but not an escape from estate taxation, because property passed to the surviving spouse in excess of the estate tax applicable exclusion amount ($3,500,000 in 2009) will be eventually subject to estate taxes (at least to the extent that it is not consumed by the surviving spouse). See footnote 6, page 21, regarding a future increase in the estate tax applicable exclusion amount.
The marital deduction can be obtained through the use of any of the following techniques:
1. Outright transfer--passes property directly to the surviving spouse. This can be accomplished in a variety of ways, to include: joint ownership with rights of survivorship; beneficiary designation; bequest or devise; inheritance; and dower or curtesy (or under state intestate succession laws).
2. Power of appointment trust--gives the surviving spouse a right to all income for life and general power of appointment over the trust assets (i.e., the unlimited right to withdraw property during lifetime or appoint property at death). In the chart on page 29, the "A" trust represents a power of appointment trust, which is also referred to as a "marital deduction trust." An expanded discussion of "general power of appointment" is contained on page 494.
3. QTIP trust--gives the surviving spouse a right to all income for life, with principal to children, or others, upon death of the surviving spouse (the executor or executrix must make this election, it cannot be mandated in the will). Property placed in a QTIP trust is subject to being taxed in the surviving spouse's estate. See the discussion and chart on pages 40-41.
4. Estate trust--can accumulate income without payments to the surviving spouse, but must be paid to the estate of the surviving spouse (i.e., surviving spouse determines who eventually receives property placed in this trust, plus any accumulated income).
5. Qualified domestic trust--assures collection of the federal estate tax when the surviving spouse is a non-citizen. An expanded discussion is contained on page 505.