The Marital Share is that portion of the deceased spouse's estate which qualifies for the marital deduction. (For more on the marital deduction, read our other blog post: "The Estate Tax, the Marital Deduction, and Bypass Planning"). However, there are multiple ways in which one can leave the marital share to the surviving spouse and still qualify for the deduction.

One obvious way to do this is an outright gift to the spouse. If one's only concern is administration, this is surely the easiest way to make a gift that qualifies for the deduction. There is no further trust administration involved, nor are there any restrictions on how the surviving spouse must distribute or manage the property. But an estate plan is never one-size-fits-all, and what works for one person may be problematic—if not a downright disaster—for another. A customized estate plan takes into account competing factors with each strategy and provides alternatives for the individual or family. In that spirit, here are some of the drawbacks of outright gifting and some alternative mechanisms to gift the marital share.

The Drawbacks of Outright Gifts to the Surviving Spouse

One drawback is the possibility of incapacity and the resulting consequences. Absent a trust, if the surviving spouse later becomes incapacitated, the assets left to the spouse will become part of his or guardianship or conservatorship estate and be administered by the court. Later on, when the spouse dies, the assets are included in the spouse's probate estate. (For more on the pitfalls of probate, read our blog, "Estate Planning with a Will or Trust Avoiding Probate and More".) Further, any property distributed outright to a spouse will provide no protection against creditors. If creditors receive a judgment against the spouse, they can "attach" their claim to the spouse's assets and take from them to satisfy debts. Finally, an outright marital gift goes to the surviving spouse with "no-strings-attached." This means the spouse can distribute the property in a way the predeceased spouse did not desire. If the surviving spouse had children from a previous marriage, or if he or she remarries in the future, the property of the deceased spouse may be left to people he or she never wanted it to and may have never known during their lifetime.

The QTIP Trust: An Alternative to Outright Marital Gifts

The marital share gift that passes to the surviving spouse will not qualify for the deduction if it violates the "terminable interest rule." This rule states that the deduction is not allowed for gifts that fail by the occurrence of some event or the failure of some occurrence. For example, a gift that terminates if the spouse gets remarried gives an "interest" to that spouse that is "terminable" and will thus lose out on the deduction. However, there are some terminable interests that do qualify for the deduction, perhaps the most notable of which is the QTIP.

QTIP stands for "Qualified Terminable Interest Property." As an exception to the terminable interest rule, this allows the spouse who makes the trust (the grantor) to establish a trust for the benefit of the surviving spouse while at the same time keeping control over how the assets will be distributed upon that spouse's death. Additionally, it allows for protection against creditors.

In order for the trust to qualify for the deduction, the surviving spouse must be entitled to receive all of the income from the QTIP trust each year. Additionally, the QTIP trust must also prohibit all individuals from distributing any QTIP property to any beneficiary other than the surviving spouse during the spouse's lifetime. What this means is that no one—not even the surviving spouse—can make distributions. It is as a result of this restriction on the surviving spouse that he or she gets protection from creditors for the assets in the QTIP trust, and its added advantage is that the property cannot be distributed to anyone the deceased spouse would have preferred it not go to (i.e. children of the surviving spouse from a previous marriage, a new spouse that the survivor gets remarried to, etc.). That is not the say that the surviving spouse may have no access to the principal. The trust can be drafted to allow the surviving spouse access to maintain his or her lifestyle to a reasonable degree.

The General Appointment Trust: Another Option for Distributing the Marital Share that Qualifies for the Deduction

Much like the QTIP trust, a general appointment trust must provide that all of trust income is payable to the surviving spouse at least annually. The surviving spouse must have the power to force the trustee to make all assets income-producing if they are not so already. Additionally, the trustee cannot appoint any property from the trust to anyone other than the surviving spouse during the spouse's life. Lastly, the surviving spouse must have the unlimited power to appoint the trust property to anyone during the spouse's life or upon his or her death.

As you can probably see, the general appointment trust gives much greater freedom to the surviving spouse. Therefore, it is less ideal than the QTIP trust in situations where the grantor wants control over the eventual distribution of the trust property. It also does not provide the protection from creditors that a QTIP does. Where it does trump an outright gift, however, is in its ability to avoid the potential for exposure to a guardianship/conservatorship and to probate.

Other Options for Distribution

What we have discussed so far are a couple of the more common options for distributing the marital share in a way that qualifies for the unlimited marital deduction. Other less common methods include:

• The Estate Trust: Unlike the QTIP and the General Appointment Trust, this does not require distribution of all income annually nor must the spouse be given the power to compel the trustee to make all assets income-producing (a feature of only the General Appointment Trust). This makes this a potential option for non-productive property with sentimental value, like a vacation home. However, the requirement that the estate trust assets be distributable to the spouse's probate estate make it a less optimal tool.
• The Qualified Domestic Trust: The unlimited marital deduction does not count for assets that pass to a surviving spouse who is not a US citizen. However, transfers to a qualified domestic trust (QDOT) can allow for a spouse to leave assets to a non-citizen spouse and still defer the tax on that transfer. Note that this is a deferral mechanism that allows tax to be incurred at the date of distribution, rather than the date of death of the predeceased spouse.