How the Marital Deduction Can Pass Unlimited Wealth to a Spouse Without Immediate Estate Tax

Leaving an entire estate to a spouse may seem like the simplest possible plan, and in the first estate, the IRS generally won’t take a cut. But that same approach can create a substantial tax bill at the second death, especially when no further planning is done.

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Federal estate tax law allows a married person to leave any amount to a surviving spouse without federal estate tax at the first death. That rule comes from 26 U.S.C. § 2056(a), which lets an estate deduct property passing to a spouse so long as the interest is included in the gross estate, with no dollar limit. The way a couple uses the marital deduction determines whether they draw on one exclusion or both. The IRS also recently announced a larger estate and gift tax exemption for a future year: estates of people who die in that year receive a basic exclusion amount of $15,480,000, compared with $15,000,000 for estates of those who died in the prior year.

Why the Deduction Often Defers the Tax

The marital deduction does not erase estate tax forever; it usually postpones it until the survivor dies. Anything the surviving spouse inherits and still owns at death is pulled back into the survivor’s own gross estate. In effect, the deduction removes assets from the first estate and shifts them into the second.

IRS Statistics of Income data shows the scale of the tax. In 2024, 7,195 estate tax returns were filed, reporting $248,944,039,000 in gross estates. Only 2,663 of those returns owed net estate tax, and together they paid $23,313,220,000. Estates valued at $50 million or more accounted for $15,845,602,000 of that total.

What Transfers Can Use the Deduction

• Property passing to the spouse: This includes bequests, jointly owned property, beneficiary designations, and similar transfers, so long as the asset is part of the gross estate.
• Terminable interests: These usually do not qualify. Under § 2056(b)(1), if an interest ends after a period of time or upon an event and another person may later receive the property, the deduction is generally denied.
• Citizen spouse: If the surviving spouse is not a U.S. citizen, § 2056(d)(1)(A) generally blocks the deduction, subject to exceptions.

Noncitizen Spouses Need a QDOT

Section 2056(d)(2)(A) restores the deduction for property passing into a qualified domestic trust, or QDOT. Section 2056A(a)(1) requires at least one trustee to be a U.S. citizen or domestic corporation, and that trustee must be able to withhold tax from distributions other than income. The executor must also make the QDOT election under § 2056A(a)(3).

A QDOT keeps the deferred estate tax in place. Under § 2056A(b)(1), estate tax applies to principal distributed while the surviving spouse is alive and to any balance remaining in the trust at the spouse’s death. Treasury rules add extra requirements for QDOTs holding more than $2 million: the trust must use a bank trustee, a bond, or a letter of credit equal to 65% of the trust’s value (26 CFR 20.2056A-2(d)(1)(i)). Section 2056(d)(4) provides that no QDOT is required if the surviving spouse was already a U.S. resident and becomes a citizen before the estate tax return is filed. Assets can also be shifted earlier through lifetime gifts: the annual exclusion for gifts to a noncitizen spouse is $194,000 for calendar year 2026 and $201,000 for calendar year 2027.

QTIP Trusts Can Balance Control in a Blended Family

A qualified terminable interest property, or QTIP, trust gets around the terminable interest limitation. Under § 2056(b)(7)(B)(ii), the surviving spouse must receive all trust income at least once a year, and no one may direct the property to anyone else while that spouse is alive. Within those limits, the first spouse can choose the remainder beneficiary, such as children from a prior marriage. The executor makes the election on the estate tax return, and once the choice is made it cannot be revoked (§ 2056(b)(7)(B)(v)). The election may also be made for only a portion of the trust (§ 2056(b)(7)(B)(iv)). The tradeoff is that QTIP property is included in the survivor’s gross estate under § 2044(a).

Example: How Leaving Everything Outright Can Cost $6 Million

Assume a hypothetical founder dies in 2026 with a $40 million estate and leaves everything outright to a spouse. The marital deduction shelters the full amount, so no federal estate tax is due, and the founder’s $15,000,000 exclusion goes unused. For simplicity, assume the survivor also dies in 2026 with the same $40 million, no additional assets, and no other deductions. Above the exclusion, the tax rate is effectively the top 40% rate under § 2001(c).

• No portability election: The survivor can protect only $15,000,000, producing a $10,000,000 estate tax.
• Portability elected: Under § 2010(c)(2), the survivor’s exclusion equals their own basic exclusion plus the deceased spouse’s unused amount. That totals $30,000,000, leaving a $4,000,000 tax.

The difference is $6,000,000, and it hinges on a single filing.

Common Errors That Squander the First Spouse’s Exclusion

• Skipping the return because no tax is due: Portability is available only if the executor files a timely estate tax return and elects it on that return. A late filing cannot preserve the election, and once made, the election cannot be undone (§ 2010(c)(5)(A)).
• Overlooking later growth: The amount transferred at the first death is fixed. Any appreciation after that is taxed in the survivor’s estate. A credit shelter trust funded at the first death can keep that growth outside the survivor’s taxable estate.
• Funding a QDOT too late: Property passing to a noncitizen spouse qualifies only if it is transferred to a QDOT, or permanently assigned to one, before the estate tax return is filed (§ 2056(d)(2)(B)).

The Questions That Determine the Right Structure

Four questions usually drive the decision: Will the combined estate likely exceed the survivor’s exclusion? Is the surviving spouse a U.S. citizen? Are there children from a prior marriage? And are the major assets the kind that can grow quickly, such as concentrated stock or a closely held business?

Simply leaving everything outright and relying on portability tends to work poorly for blended families that want to control where the money eventually goes, for couples holding rapidly appreciating assets, and for noncitizen spouses. Trust-based plans tend to work less well for couples far below the exclusion amount who want simplicity, and for surviving spouses who need unrestricted access and control.

Regardless of the structure, paperwork mistakes cause many of the problems: outdated beneficiary forms, accounts that were never retitled, or trusts that were drafted but never funded. The full cleanup checklist is available in a free estate guide.

The $15,480,000 figure applies only to deaths in that future year. Any estate plan should be checked against the exclusion available in the year of each death.