A marital deduction trust is an estate planning arrangement that receives assets from a deceased spouse in a form that qualifies for the federal unlimited marital deduction, which defers estate tax until the surviving spouse also dies. Because the deduction eliminates estate tax on the first death, the full value of the transferred property stays intact for the surviving spouse’s benefit. For 2026, the federal estate tax exemption is $15,000,000 per person, so a married couple can shelter up to $30,000,000 between them before any federal estate tax applies.1Internal Revenue Service. What’s New – Estate and Gift Tax
How the Deduction Is Earned
Federal law lets an estate deduct the full value of property passing from a deceased person to their surviving spouse, with no dollar cap.2Office of the Law Revision Counsel. 26 USC 2056 – Bequests, Etc., to Surviving Spouse The property has to be included in the deceased spouse’s gross estate, it has to actually pass to the surviving spouse (through a will, beneficiary designation, joint tenancy, or a qualifying trust), and the surviving spouse must be a U.S. citizen.
The largest obstacle is the terminable interest rule. If the surviving spouse’s interest in the property ends at some point and someone else then gets it, the deduction is denied. The government’s concern is straightforward: it does not want assets to skip the surviving spouse’s estate entirely and escape tax at both deaths. The statute carves out specific exceptions to this rule, and each exception is the legal backbone of one of the trust structures below. Each exception requires the surviving spouse to have enough ownership or control that the property will eventually appear in their taxable estate.2Office of the Law Revision Counsel. 26 USC 2056 – Bequests, Etc., to Surviving Spouse
The Three Trust Structures
Which structure fits depends on how much control the first spouse wants the survivor to have, and how much control the first spouse wants to keep over who ultimately inherits.
QTIP Trust
The Qualified Terminable Interest Property trust is the most common. Two things have to be true: the surviving spouse must receive all trust income at least once a year, and no one can direct any principal to anyone other than the surviving spouse during their lifetime.2Office of the Law Revision Counsel. 26 USC 2056 – Bequests, Etc., to Surviving Spouse
The point of a QTIP is that the first spouse decides, in the trust document, who inherits after the surviving spouse dies. The survivor receives income for life but cannot redirect principal to a new partner or anyone else. That is why QTIPs dominate in blended families, where the first spouse wants to provide for the survivor while making sure children from a prior marriage ultimately receive the assets. The executor has to affirmatively elect QTIP treatment on Schedule M of Form 706, and the election is irrevocable.3Internal Revenue Service. Instructions for Form 706
General Power of Appointment Trust
This structure also requires that the surviving spouse receive all income at least annually, but it hands the spouse a general power of appointment over principal. The spouse can direct the assets, at death, to their own estate, their creditors, or anyone else.4Office of the Law Revision Counsel. 26 USC 2056 – Bequests, Etc., to Surviving Spouse The power must be exercisable by the spouse alone, without any veto by another party. The trade-off is simple: the surviving spouse gets full flexibility, and the first spouse gives up any say over the ultimate destination of the property.
Estate Trust
An estate trust does not require annual income distributions. The trustee can accumulate income. The qualifying condition is that all remaining principal and accumulated income must be payable to the surviving spouse’s probate estate at their death. Because the trust corpus eventually flows into the survivor’s estate for probate, it does not escape taxation, which satisfies the marital deduction rules. Estate trusts are less common than QTIPs but useful when the trust holds low-yield assets like raw land or growth stocks, where forced annual distributions would be impractical.
If the Surviving Spouse Is Not a U.S. Citizen
The unlimited marital deduction is not available when the surviving spouse is not a U.S. citizen. The only path to deferral in that case is a Qualified Domestic Trust (QDOT), which carries stricter rules because the government wants the assets to stay within U.S. tax jurisdiction.2Office of the Law Revision Counsel. 26 USC 2056 – Bequests, Etc., to Surviving Spouse At least one trustee must be a U.S. citizen or a domestic corporation, and that trustee must have the right to withhold estate tax from any principal distribution. Income distributions to the surviving spouse are tax-free, but principal distributions trigger an immediate estate tax computed as if the amount were part of the deceased spouse’s estate.5Office of the Law Revision Counsel. 26 USC 2056A – Qualified Domestic Trusts Trusts holding more than $2 million require additional security, such as a bond or letter of credit.6Internal Revenue Service. Instructions for Form 706-QDT
Funding the Trust After the First Death
Once the first spouse dies, the trust has to be formally funded. The funding formula in the will or revocable trust determines what value flows into the marital trust and what value goes into any companion trust, such as a bypass or credit shelter trust. Two formulas do most of the work.
A pecuniary formula funds the trust with a specific dollar amount, usually calculated to reduce the first estate’s tax to zero. It is simple, but if the executor uses appreciated assets to satisfy that fixed obligation, the transfer can trigger capital gains tax, because using appreciated property to pay a set dollar amount is treated like a sale.
A fractional share formula funds the trust with a percentage of the total estate. The surviving spouse receives a proportional share of each asset rather than the satisfaction of a dollar debt, so no gain is recognized at funding. It is more complex to administer but sidesteps the capital gains problem.
Disclaimer as an Adjustment Tool
The surviving spouse can also shift how much lands in the marital trust by disclaiming part of the inheritance. A qualified disclaimer must be irrevocable and in writing, signed by the disclaiming spouse, and delivered within nine months of the deceased spouse’s date of death. The spouse cannot have already accepted the property or any benefit from it.7eCFR. 26 CFR 25.2518-2 – Requirements for a Qualified Disclaimer Disclaimed property typically drops into the bypass trust, which can be useful for making full use of the first spouse’s exemption.
Running the Trust
Once funded, the trustee has real duties. In a QTIP or general power of appointment trust, all net income has to be distributed to the surviving spouse at least once a year. Missing that distribution does not just breach the trust; it can retroactively disqualify the marital deduction and create a tax bill that should never have existed.
The trustee files Form 1041, the fiduciary income tax return, every year the trust earns more than $600 in gross income. Calendar-year trusts file by April 15; fiscal-year trusts file by the 15th day of the fourth month after the tax year closes.8Internal Revenue Service. File an Estate Tax Income Tax Return Income distributions are reported to the surviving spouse on Schedule K-1, and the spouse picks up that income on their personal return.
Investment management follows the Prudent Investor Rule, which requires balancing the surviving spouse’s income needs against the interests of whoever inherits when the spouse dies. Those interests often pull in opposite directions: the surviving spouse wants steady income, and the remainder beneficiaries want growth. Many planners handle the tension by loading income-producing assets like bonds and dividend stocks into the marital trust while pushing growth assets into a companion bypass trust, where appreciation stays outside the surviving spouse’s taxable estate.
What Happens at the Second Death
The marital deduction defers tax; it does not eliminate it. When the surviving spouse dies, the trust assets come back onto the tax rolls.
For a QTIP, federal law explicitly pulls the full value of the trust property into the surviving spouse’s gross estate.9Office of the Law Revision Counsel. 26 USC 2044 – Certain Property for Which Marital Deduction Was Previously Allowed For a general power of appointment trust, the assets are included because the surviving spouse held the power to direct them anywhere.10Office of the Law Revision Counsel. 26 USC 2041 – Powers of Appointment The surviving spouse’s executor combines the trust assets with the spouse’s personal assets and applies the federal estate tax exemption ($15,000,000 in 2026) to the total.1Internal Revenue Service. What’s New – Estate and Gift Tax The top federal estate tax rate above the exemption is 40%. Any unused exemption carried over from the first spouse’s estate is available if the executor made a portability election on the first spouse’s Form 706.11Internal Revenue Service. Form 706 – United States Estate (and Generation-Skipping Transfer) Tax Return
Step-Up in Basis
Inclusion in the surviving spouse’s estate carries a real upside for the eventual heirs. Because the trust property is part of the survivor’s gross estate, it receives a stepped-up income tax basis equal to fair market value on the date of death.12Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent If the first spouse bought stock for $200,000 and it is worth $1,000,000 when the surviving spouse dies, the beneficiaries take it with a $1,000,000 basis and can sell the next day with no capital gains tax. This double step-up, once at each spouse’s death, is one of the most valuable features of a marital deduction trust and is not something a bypass trust can replicate.
Marital Trust or Portability
Since 2011 a surviving spouse can claim the deceased spouse’s unused exemption through a portability election, which raises a fair question: why set up a trust at all? For some couples, portability alone is enough. But trusts do things portability cannot.
The biggest gap is appreciation. Assets in a bypass trust (the usual companion to a marital trust) are frozen at the first spouse’s date-of-death value for estate tax purposes. If $5,000,000 in a bypass trust grows to $12,000,000 by the survivor’s death, that $7,000,000 of appreciation passes to beneficiaries free of estate tax. Under portability, those same assets sit in the surviving spouse’s estate, and every dollar of appreciation is taxable.
Trusts also offer creditor protection in most states. Assets in a properly structured bypass trust are generally beyond the reach of the surviving spouse’s creditors, lawsuits, and any future spouse. Portability provides no asset protection.
Portability is simpler and cheaper. There is no trust to draft, fund, administer, or file annual returns for. For couples whose combined estate sits comfortably below the exemption, portability handles the job without the overhead. The decision usually turns on the size of the estate, the surviving spouse’s risk profile, and whether blended-family concerns demand the control a trust provides.
Watch for State Estate Tax
The marital deduction defers federal estate tax, but roughly a dozen states and the District of Columbia impose their own estate taxes with exemption thresholds well below the federal level. Some states exempt as little as $1,000,000. A couple whose estate is comfortably under the $15,000,000 federal exemption can still face a six-figure state estate tax bill.
Many of these states have decoupled their estate tax from the federal system and set their own exemptions independently. The marital deduction generally applies at the state level too, so a transfer to a surviving spouse defers state estate tax as well. The catch is in the funding formulas. A formula built to maximize the federal exemption can overfund a bypass trust for state purposes and create a state tax liability at the first death that the couple never anticipated. Planners in decoupled states often use separate state-optimized formulas or disclaimer-based plans to work around the gap between the state and federal exemptions.