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Tax Privileges

The remaining tools of the estate planner focus on two major tax advantages provided by Congress: the unlimited marital deduction and the unlimited charitable deduction. In addition, the tax code provides a unified credit that can eliminate federal estate taxes entirely for many estates.

The Marital Deduction

Since 1982, the marital deduction has been unlimited. Almost any property transferred to a spouse — whether by lifetime gift or bequest at death — passes estate and gift tax-free. The net result, however, is that the surviving spouse’s estate is ultimately taxed on the entire joint estate.

The marital deduction poses both advantages and potential drawbacks:

  • Advantage: the estate of the first spouse to die pays no estate tax on property left to the surviving spouse
  • Drawback: all property passing to the survivor is eventually taxed in the surviving spouse’s estate. A plan of “leaving everything to each other” may underutilize other planning tools and result in the couple paying more in total estate taxes than necessary

To qualify for the unlimited marital deduction, the property transferred must meet certain requirements. Outright transfers to a surviving U.S.-citizen spouse qualify automatically. Qualified terminal interest property (QTIP) also qualifies if elected by the executor.

Marital Deduction Trusts

Power of Appointment Trust
If the surviving spouse receives all income at least annually from a trust and holds a general power of appointment exercisable during life or at death, the trust property qualifies for the marital deduction. Property is not taxed until the death of the surviving spouse.
QTIP Trust
Pays the surviving spouse all income at least annually; no one may hold a power to appoint the property to anyone other than the spouse. The executor must elect QTIP treatment on the estate tax return. The QTIP property’s value is then included in the surviving spouse’s taxable estate.
Non-citizen spouses: The unlimited marital deduction is not available for property passing to a non-citizen spouse. Instead, a Qualified Domestic Trust (QDOT) must be used to defer estate taxes on property passing to a non-citizen surviving spouse. QDOT rules are covered in Module 1 and further in Module 3.

Charitable Contributions

Like the marital deduction, the deduction for charitable contributions is unlimited for estate and gift tax purposes. The process can be as simple as an outright gift of cash or property, or the gift can be structured as a charitable trust to accomplish several goals simultaneously.

Congress encourages charitable donations through several tax benefits:

  • No gift or estate tax on charitable transfers of any amount
  • Limited income tax deductibility for lifetime charitable contributions (subject to AGI limits)
  • The charity pays no income tax on receipt of the gift or on income earned from the donation

To qualify for the unlimited gift or estate tax charitable deduction, the recipient organization must engage in religious, charitable, scientific, educational, or literary activities. The IRS publishes an annual list of qualified charities (Publication 78). Various charitable giving techniques — including charitable remainder trusts, charitable lead trusts, and donor-advised funds — are covered in Module 3.

The Unified Credit (Applicable Exclusion)

2024 Applicable Exclusion Amount
$13.61 Million
Per person • $27.22 million for a married couple with portability • Unified across gift and estate taxes

The federal unified credit offsets, dollar for dollar, any federal estate or gift tax liability. In effect, it shelters up to $13.61 million (2024) from federal transfer taxes. For this reason, the credit is commonly referred to as the “applicable exclusion amount” or the “exemption.”

Due to this exclusion, many estates avoid federal estate taxes without any special tax-saving strategies. Larger estates will attempt to maximize the use of this credit before utilizing other planning tools. Various strategies to maximize the unified credit — including credit shelter trusts (bypass trusts), portability elections, and spousal lifetime access trusts (SLATs) — are examined in Module 3.

Sunset Warning: The current $13.61 million exclusion amount is the result of a temporary doubling enacted by the 2017 Tax Cuts and Jobs Act. Unless Congress acts, the applicable exclusion amount is scheduled to revert to approximately $7 million (adjusted for inflation) after December 31, 2025. Estates between approximately $7 million and $13.61 million that take no action before the sunset may face significant estate tax exposure. Advisors should discuss this planning opportunity with clients now.
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