Section 2056 of the federal estate tax permits the deceased to provide surviving spouse the freedom and unconditional power to manage the life estate for her/his own benefit. The surviving partner has the power to manage and control the property and receive all the benefits of the property during his/her lifetime. The law also states that when the whole estate of the decedent is left for the surviving spouse, first spouse loses his/her lifetime exemption. The surviving spouse is left with the obligation to do estate and tax planning as combines estates.It’s easier when the combined estates are less than $2 million.
The statement of the law is: “For purposes of the tax imposed by section 2001, value of the taxable estate shall, except as limited by subsection (b), be determined by deducting from the value of the gross estate an amount equal to the value of any interest in property which passes or has passed from the decedent to his surviving spouse, but only to the extent that such interest is included in determining the value of the gross estate.”
There are 6 basic requirements for the marital deduction to come into action:
1. There should be surviving spouse
2. The descendent and the surviving spouse must be legally married under the federal law.
3. The surviving spouse must be U.S citizen or registered to a QDOT.
4. The property should be added to the gross estate of the surviving spouse.
5. Whatever is left by the descendant for the surviving partner (asset/property/life insurance) must be received by the surviving spouse only and it is not transferable.
6. The property interest cannot be a non-deductible terminal interest; otherwise the surviving spouse will not be able to use the benefits of the act.
The idea of IRC Section 2056 simply is that the spouse can pass his / her property or asset to the surviving partner without the property/asset being taxed. The federal law exempts the spouses to take the advantage of this break by creating a “marital deduction trust” during their lifetime. After the trust comes in action both the partners can escape their federal estate taxes when they kick the bucket.ii Otherwise this was only possible for the deceased partner through the section 2056 deduction. There are various formalities to be taken into account when forming a trust. For a trust to claim the deduction, the surviving spouse must adhere to following points:
• The surviving partner must be the only beneficiary of the trust during her life.
• The surviving partner must be given the power to either receive the benefit from the trust of dispose off the trust at his/her will.
• It must also specify the exact amount or limit to be given to the surviving spouse.