How does a spousal trust let me defer tax on property I leave to my spouse?

A spousal trust set up through your will lets property pass to a trust for your surviving spouse or common-law partner's benefit on the same tax-deferred rollover basis as leaving it to them directly, as long as your spouse is entitled to receive all of the income the trust earns during their lifetime and no one else can receive income or capital from the trust while your spouse is alive. Instead of your estate being deemed to have sold the property at fair market value when you die, the trust takes it over at your original cost, and no capital gain is triggered at that point.

The benefit is deferral, not elimination: tax on the accrued gain is still coming, generally when your spouse dies or earlier if the trust sells the property or is wound up, at which point the trust faces its own deemed disposition. A spousal trust also lets you control what happens to the property after your spouse's death — directing it to your children, for example — in a way that leaving property outright to your spouse doesn't guarantee, since they could otherwise redirect it in their own will.