Marital deduction

The unlimited marital deduction and its terminable interest rule, QTIP elections, the non-citizen spouse limitation and qualified domestic trusts, and coordinating the deduction with the exclusion amount and portability so the couple's combined estate tax is minimised.

Internal Revenue Code Section 2056Qualified domestic trust

Practice question for this objective

Free sampleEstate Planninghard

Marcus dies leaving an estate of 4,000,000 dollars. His will directs 3,000,000 dollars into a trust that must pay all of its income to his surviving wife Elena, a United States citizen, at least annually for her life, with the capital passing at her death to Marcus's two children from his first marriage. Elena may not withdraw capital and has no power to decide who receives it. The executor wants the 3,000,000 dollars to qualify for the federal estate tax marital deduction in Marcus's estate. What is the correct position?

ANo marital deduction is available, because Elena's income interest ends at her death and the terminable interest rule denies a deduction wherever the property then passes to somebody else
BThe full 3,000,000 dollars qualifies automatically, because the trust pays Elena all of its income at least annually for life and no other person may receive anything from it while she lives
CA deduction is available only if the trust gives Elena a general power to appoint the whole fund to anyone she chooses, including her own estate, that being the single route around the terminable interest rule
DThe executor may elect qualified terminable interest property treatment on a timely filed Form 706, deducting the full 3,000,000 dollars in Marcus's estate and including the trust in Elena's estate at her death Correct

A life income interest is a non-deductible terminable interest unless the executor elects qualified terminable interest property treatment on a timely filed estate tax return. The marital deduction is denied for a terminable interest, meaning an interest that ends on a lapse of time or on the death of the surviving spouse and then passes to another person for less than full consideration. Elena's income interest is exactly that, so the trust fails at first sight. The qualified terminable interest property exception rescues it where the surviving spouse receives all of the income at least annually for life and nobody may appoint any part of the property to anyone other than the surviving spouse during her lifetime, and where the executor makes the election on the estate tax return. Both structural conditions are met here, so the only missing step is the election itself. Because the election is affirmative rather than automatic, an executor who files without making it loses the deduction permanently. The trade is symmetrical: the property escapes tax in Marcus's estate and is instead included in Elena's estate at her death, while Marcus retains the power to fix who receives the capital.

Why A is wrong: The terminable interest rule is the correct starting point and does deny the deduction on the face of the will, which makes this tempting, but the rule carries an exception the executor can claim by election, so the outcome is not settled by the trust terms alone.

Why B is wrong: Those two features are genuine conditions of the exception, which is why this reads as complete, but qualification is never automatic for a life income trust; without an affirmative election on the estate tax return the interest stays terminable and the deduction is lost.

Why C is wrong: A general power of appointment trust is a real route to the marital deduction, so the mechanism named here exists, but it is not the only route and it would let Elena divert the capital away from Marcus's children, destroying the purpose of his plan.

Why D is correct: The election converts a non-deductible terminable interest into a deductible one, and the price of the deduction is that the whole trust is brought back into Elena's taxable estate when she dies rather than escaping transfer tax in both estates.

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Exam traps in Estate Planning

Answers that look right on this material and are not. Each one is a distractor from a different question in the CFP bank for this domain.

The unlimited marital deduction applies just as the executor assumes, because Ingrid is a lawful permanent resident and residence rather than citizenship is the test that governs the deduction
Why it is wrong: Residence is the test that decides whether a person is taxed on worldwide assets, so the substitution feels reasonable to a candidate who has met that rule, but the marital deduction turns on citizenship and is denied outright where the surviving spouse is not a United States citizen.
Yes, because the refusal is in writing, was delivered well within nine months of the death, and follows no acceptance of the property or of any benefit from it
Why it is wrong: Three of the four conditions are indeed satisfied here, which is exactly what makes this tempting, but a qualified disclaimer also requires that the property pass without any direction from the person disclaiming, and Mateo directed it.

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