The Estate Tax Rule That Lets You Leave Your Spouse Unlimited Wealth Tax-Free

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Leaving everything to your spouse sounds like the safest estate plan there is, and the IRS will not tax a dollar of it. But a hypothetical founder's tidy handoff sets up a seven-figure bill for the second death, and one overlooked filing decides who pays it.

Federal estate tax law lets a married person leave any amount to a surviving spouse with no federal estate tax due at the first death. The rule is 26 U.S.C. § 2056(a). It lets an estate deduct the value of any property interest that passes from the deceased person to the surviving spouse, as long as that interest is included in the gross estate, and the statute puts no dollar cap on it.

The marital deduction pushes the estate tax back to the second death. Whatever the survivor inherits and still owns at death counts in the survivor's own gross estate. The deduction removes assets from the first estate and adds them to the second.

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