Unlimited Marital Deduction: Tax-Free Spouse Asset Transfers

Where there’s a deed, there must be an estate plan. Every deed holder must decide where that ownership interest will go when they’re no longer around.

Good planning takes into account how a property transfer will be taxed upon death. For spouses, there are tax advantages to know about. A key example? The unlimited marital deduction.

Read on to explore common questions married people ask about marriage, deeds, death, and tax deductions.

Can I leave my deed to my spouse without creating any estate or gift tax issues?

One spouse can leave their home or entire estate to the surviving spouse free of federal estate tax. This is based on the unlimited marital deduction in the U.S. Internal Revenue Code.

This provision defers taxes on transferred assets until the surviving spouse dies. Note that it’s still possible for estate taxes to apply later. That’s because once the second spouse dies, the transferred assets still owned by that spouse may be included in their taxable estate.

Is a marital deduction the same as no tax?

A deduction, even an unlimited deduction, does not erase taxes. The marital deduction is only a tax deferral. Estate taxes, for high-value estates, can still come into play when the second spouse dies.

In other words, assets transferred to and kept by a surviving spouse may be taxed later. But a surviving spouse who remarries and wishes to transfer an interest to the new spouse can do it tax-free.

What’s the reason for the marital deduction provision?

It’s related to inflation concerns. In 1982, Congress set out to spare married people from winding up in higher tax brackets because the value of their assets had risen with inflation.

The unlimited marital deduction, therefore, allows spouses to deduct the full value of transfers between themselves for federal estate and gift tax purposes. The provision treats you and your spouse as the same taxable entity, so changing your deed won’t count as a taxable gift transfer. This relief from estate and gift taxes helps keep wealth within families.

If I quitclaim an interest in my home to my spouse, gift tax won’t apply?

Essentially, that’s correct. While quitclaiming a spouse onto a deed is a gift for tax purposes, transfers between spouses typically receive the unlimited marital deduction. This is why you don’t owe federal gift tax when you quitclaim a deed to make your spouse a co-owner.

That said, keep in mind the long-term implications when either of you transfers a property interest to someone else. It could affect capital gains taxes and exclusions. That is, a transfer between spouses won’t be subject to taxes when it’s done, yet tax can still be an issue in future transactions. Also, buyers or mortgage lenders will expect both co-owners to be involved in any refinancing or transfer of the home.  

What does quitclaiming an interest actually mean?

A very common way one spouse brings the other onto the home deed is by creating a quitclaim deed. This is a simple way to transfer an ownership interest to the spouse. It does not require a title search and does not guarantee that the title is clear.   

Know that the tax implications of bringing a co-owner onto the deed hinge on federal and state tax rules and how the parties structure their co-ownership under the law of the state where the home is located.

What if my spouse is not a U.S. citizen?

According to the federal tax code, non-citizen spouses aren’t eligible for the unlimited marital deduction. Instead, look into a qualified domestic trust (QDOT) if you’re talking about a large estate and you’re concerned about estate tax. If the spouse becomes a U.S. citizen, the QDOT passes the value along tax-free.

If no tax needs to be paid, do I need to report a transfer?

It still helps to report and document transfers even in cases where no gift tax applies. This can head off any confusion later on. Check with your financial adviser or tax pro if you are unsure how or whether to report any significant financial move.

Whenever you transfer property for no payment, be sure to ask your professional whether and how capital gains taxes would apply in your situation. Note the primary residence capital gains exclusion, which reduces exposure to taxes on the transfer of an owner-occupied home. 

What if we live in a community property state?

State law can change the calculus. For example, bringing a spouse onto the deed in a community property state can ease capital gains taxes in the future. A deed holder should review the way their ownership is treated by state law. Study both the tax impacts and the legal protections offered if you decide to co-own the property.

There may be a range of pros and cons depending on your state’s property vesting structure. For instance, will a deed transfer make a home vulnerable to creditors who could impose a lien in order to go after the debts of one spouse? If one spouse has existing debts or could be subject to legal judgments in court, then a tenancy by the entirety type of vesting offers protection.

Do I need to update my will if I transfer an ownership interest in my home to my spouse?

Always update your will (either with a whole new will or a codicil appended to your current will) when you make a significant change in the way you hold assets or when key relationships change in your life.

Then, make sure your will matches the way the deed shows your home will pass when you die.

All of your beneficiary designation forms and the language of your will should match the way your deed is written. The best time to think about this is before you transfer a deed.

Are there other things spouses need to know about transfers?

Bet on it. Tax law is complex and can change from year to year, depending on the prevailing sentiments in Congress. The above information is simply intended as a starting point for your own due diligence. It is not personalized legal, tax, or financial advice.

To explore options such as the various marital trusts out there, see a licensed professional who can guide you through financial, tax, and legal details before making changes to the names on your deed. For example, one kind of marital trust is the qualified terminable interest property (QTIP) trust, which secures income for a surviving spouse.

And do speak with your tax pro about reporting requirements—whether or not you’ll need to pay taxes on a deed transfer.