The marital deduction plays an important role in both gift and estate tax. Everything you give or leave your spouse in a qualified form is deductible (and potentially taxable in your spouse's estate). The effect is to enable tax-free transfer among parents -- with a price collected from the children.

The key words are "qualified form".

Anything you leave or give your spouse outright will qualify. This will apply to the fractional share of joint tenancies if your spouse can sever them.

The complication comes with trusts, which many people want to provide for their spouses.

If you establish a trust which, upon your spouse's death, will pass to someone other than your spouse's estate, it is a terminable interest. It will not qualify for the marital deduction unless it meets certain criteria.

It must pay all income to your spouse.

Your spouse must have the power to require the trustee to convert unproductive property to productive property.

Pre-1981, your spouse had to have the power to either withdraw principal or to name their estate as a beneficiary after death (a general power of appointment). Either of such powers would make the trust includible in the spouse's estate.

1981 tax revisions introduced the Qualified Terminable Interest Property (QTIP). If the executor of your estate *elects* to claim the marital deduction for a trust which otherwise qualifies, even without the power to withdraw or general power of appointment, it is deductible. And if the executor does so, even if not otherwise includible in your spouse's estate, it will be included.

If the math of the first estate makes it desirable, the executor can elect to deduct only a portion of the trust -- e.g. 72.731%. In that case, 72.731% of the trust value at your spouse's death will be includible.

Furthermore, if the trust provides for payments of principal to your spouse, it can be drafted to have those payments charged against the includible portion of the trust.

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