Marital Deduction

For purposes of the unified gift and estate tax, you can - during your lifetime, or at death - give an unlimited amount of wealth to your spouse tax-free. This can be a great advantage, but may not be the panacea that you think.

The disadvantage is that, although you can transfer any amount that you want to your spouse, if your spouse survives you (and does not remarry), there will be no marital deduction available to lessen the estate tax liability at his or her later death. Beginning in 2011, the law permits the second-dying spouse to use the deceased spouses unused exclusion amount--provided the proper election was made when the first spouse died. Thus, the unused portion of the first spouse's lifetime exclusion amount (often $5 million if everything went to the surviving spouse) is added to the survivor's $5 million lifetime exclusion, providing the ability to transfer up to $10 million tax-free ($10,500,000 in 2013 due to indexing for inflation.)

However, if the surviving spouse remarries, others that you would want to benefit will lose out. For this reason, if there are other beneficiaries you want to provide for, it's often a good idea not to give everything to the spouse outright, but to use a other planning techniques, such as trusts or a credit shelter bequest.