The IRS allows you to make an unlimited number of tax-free transfers to your spouse. The idea behind the marital gift deduction is that spouses shouldn’t be forced to pay gift tax on gifts they make to each other. In most cases, you don’t have to file a gift tax return and there is no income tax liability. The IRS does have a few limitations you might want to keep in mind regarding the marital gift tax deduction.
There is no cap on the number of gifts you can make or the dollar amount of each gift. However, the IRS does stipulate that you must be married to your spouse at the time you make the gift in order to use the marital gift deduction. If you are divorced, you can still make gifts to your former spouse, but the gift tax exclusion is limited, for 2013, to $13,000. If your spouse isn’t a U.S. citizen, the annual gift tax exclusion is $139,000.
You must relinquish all rights and ownership of the asset to take advantage of the marital gift tax deduction. If you own the property jointly or if the property is held solely in your name, you must retitle the asset so only your spouse is listed on the title. Your spouse must accept the gift and take physical possession of the property. Your spouse must have absolute ownership and control over the property.
Deceased Spouse Unused Exclusion
Every person has a unified tax credit that can offset gift tax and estate tax. For 2013, that amount is $5.172 million. If you are a surviving spouse, you can take advantage of the Deceased Spouse Unused Exclusion Amount (DSUEA) enacted under The Tax Relief Act of 2010. The DSUEA lets you add the unused amount of your deceased spouse’s unified tax credit to your unified tax credit. For example, if your deceased spouse had $5 million in unified tax credit remaining, you can add that to your $5.172 million for a total unified tax credit of $10.172 million.
You can’t use the marital gift deduction to fraudulently transfer assets to your spouse. If you’re trying to hide your assets from your creditors or from a court proceeding, the gift will be considered a fraudulent transfer. In this case, your creditors can seize the property and the court can set aside the transfer even if you transferred the title into your spouse’s name. Your creditors can also name your spouse as a defendant in a lawsuit even if your spouse had no knowledge of the reason behind the gift transfer.
- IRS: Instructions for Form 709 – Page 1, What’s New
- Legal Dictionary: Rules of Gift-Giving
- IRS: Guidance on Electing Portability of Deceased Spousal Unused Exclusion Amount
- IRS: Publication 950 – Unified Tax Credit
- Florida Asset Protection Blog: Transfers To Your Spouse Likely Reversed As Fraudulent Conveyances
Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.