The marital deduction is an important estate planning tool. It provides that any assets passing to a surviving spouse pass tax free at the time the first spouse dies (assuming the surviving spouse is a U.S. citizen). However, the marital deduction ends after the first death. Unless the surviving spouse remarries, the real impact of the federal estate tax is felt at the second death. In fact, the bill may even be higher if the estate continues to grow.
The "Second-Death" Problem
How big a mistake can it be for an estate owner to leave everything to his or her spouse under the marital deduction? Consider this example – a married couple with two children each have assets of $1 million, which they intend to leave to each other under the unlimited marital deduction. If the husband dies first and leaves his entire $1-million estate to his wife under the unlimited marital deduction, his taxable estate will be zero. As a result, however, if the wife does not remarry, her gross estate at her death could be $2 million, under the unlikely assumption that the assets will not appreciate. Without some careful estate planning, the federal estate tax could take a big bite out of the children's inheritances at their mother's death.
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