A marital deduction trust is a trust in which transfers of property between married partners are free of federal transfer tax. A marital deduction trust can take one of two forms, either a life estate coupled with a general power of appointment given to the spouse or a Qualified Terminable Interest Property (QTIP) trust.
The effect of the marital deduction trust is that it sheilds both spouse's assets and estates from federal estate taxes because when the first spouse dies, the assets indicated by the settlor (the spouse who created the trust) pass to the marital trust free and clear of any and all federal estate taxes. Neither the settlor-spouse nor the surviving spouse pay taxes on the property. Moreover, when the surviving spouse dies the assets under the trust are not included as part of her estate, thus her federal taxes are not as high as they would have been had there not been a trust.
Definition in part provided by Lawyers.com