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Marital Share Funding Options

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When couples are planning how their estate will be distributed to their beneficiaries, one common goal is to maximize the amount that can pass to their heirs by minimizing estate tax obligations. Another consideration, however, is providing for the surviving spouse after one member of the couple has passed. Planning can also be complicated by changes in the tax code; while recent changes in the law have dramatically increased the amount of an estate that is exempt from federal estate taxes, that amount is set to decrease sharply at the start of 2026. Certain marital share funding options can help meet the goal of minimizing taxation while providing flexibility in estate planning.

The Unlimited Marital Deduction

When one spouse passes, the law is intended to protect them from incurring massive tax liability as a result of inheriting their spouse’s share of property and assets. Provided that the surviving spouse is a U.S. citizen, all property can pass to them without using any portion of the deceased spouse’s estate tax exclusion amount. The combined value of the estate is not taxed until the second spouse has also passed.

This “all to surviving spouse” marital share funding option may be appropriate if someone’s estate is modest and the total amount is unlikely to exceed the threshold for estate taxes. However, it is not possible to know in advance what that threshold may be when the surviving spouse passes. By then, the opportunity to shield a portion of the estate from taxation by using some or all of the first spouse’s estate tax exclusion amount will have already passed.

If, however, a surviving spouse does not want specific assets or a certain portion of assets, for example if they want to keep their estate below the level that would trigger estate taxes upon their death, they can execute a disclaimer under applicable statutory law. That disclaimer will cause the disclaimed property to be distributed to, or for the benefit of, other beneficiaries, with the deceased spouse’s unused estate tax exclusion applied to its value. Generally speaking, the surviving spouse is then unable to benefit from or have control over the disclaimed property.

Disclaimer Marital Share Funding

In the disclaimer marital share funding option, the estate’s fiduciary allocates the deceased spouse’s property to the marital share, unless the surviving spouse exercises a qualified disclaimer (per Internal Revenue Code §2518). Disclaimed assets and property are allocated the nonmarital share; the terms of these are already established in the estate plan. While the marital share passes under the unlimited marital deduction and can be distributed to or held in trust for the benefit of the surviving spouse, the unused estate tax deduction of the deceased spouse is allocated to the value of the nonmarital share. Depending on the terms of the deceased’s estate plan, that share can be held in a bypass or credit shelter trust or distributed to the residuary beneficiaries.

One advantage to this method is that the surviving spouse can choose the assets subject to the disclaimer. In addition, if using the drafted disclaimer option, the surviving spouse may retain an interest in and be able to benefit from disclaimed assets under a bypass or credit shelter trust. However, there are important caveats to this approach. The surviving spouse cannot hold a limited or general power of appointment over disclaimed assets funded into a credit shelter or bypass trust. Also, a qualified disclaimer has a strict deadline and must meet specific legal requirements at the state and federal level. It’s essential to have an experienced estate planning attorney assist with the planning and implementation of a disclaimer marital share funding strategy.

The Clayton Election

Another postmortem estate tax planning option is the Clayton Election, which is similar to the disclaimer option but works differently. The fiduciary allocates all of the deceased spouse’s property to the nonmarital share (or bypass trust). Any property listed on Schedule M of the deceased’s federal estate tax return (Form 706), however, is subject to a qualified terminable interest property (QTIP) election. This allocates it to the marital share. More time is gained for creating and funding the marital share, and the surviving spouse may retain a limited power of appointment over the marital share funded with assets so allocated.

An independent fiduciary should make the QTIP election, because of the possibility of adverse or unintended gift tax or breach of fiduciary duty implications; if a Clayton Election is contemplated, the deceased’s estate plan should either appoint, or designate a method to appoint, an independent fiduciary for this purpose. Also, because this method has special drafting considerations and requires the filing of a Form 706, an experienced estate planning attorney is essential for both drafting and administering this strategy.

The Importance of Advance Planning

Marital share funding options give a surviving spouse and other family members options for effectively using a deceased spouse’s unused estate tax exclusion amount, but they require timely action after the death. This is a time when the family is grieving and under considerable stress, and thus may make decisions they regret later if the subject has not been contemplated before.

The estate law experts at Bridge Law LLP can help. We assist our clients with individualized strategies that use the methods most appropriate to their situation to avoid unnecessary gift and estate taxes and protect their assets. To learn more about how you can plan ahead to safeguard your legacy, contact us here.

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