To qualify for the marital deduction, the property must pass to the surviving spouse outright, or the surviving spouse must be given a general power of appointment over the property. A general power of appointment means that the surviving spouse has the power to appoint or give the property to anyone she chooses, including herself. If the surviving spouse has general power of appointment over the marital deduction trust, then the property in the trust will not be taxed upon the death of the first spouse. However, it will be subject to estate taxation upon the death of the surviving spouse. The remaining portion of the property of the first spouse to die is used to create a second trust, called a remainder trust.
Property placed in the remainder trust is taxed upon the death of the settlor.
The remainder trust property generates income, which is usually paid to the surviving spouse for the rest of her life. The surviving spouse has no power over the remainder trust, except for the right to receive income from the trust for life. When the surviving spouse dies, the remainder trust property passes to the ultimate beneficiaries named by the settlor. The remainder trust property is not included in the surviving spouse's estate upon her death. This last fact is the crucial reason a dual trust format can decrease the total estate taxes paid by a couple.