In general, if the surviving spouse is not a U.S. citizen, assets passing from the deceased spouse to the surviving spouse do not qualify for the unlimited marital deduction for estate tax purposes.  The logic behind this rule is based on the notion that the IRS only allows the marital deduction if it is reasonably certain that the assets benefiting from the marital deduction will be subject to the estate tax as part of the surviving spouse’s estate when he or she passes away.  If the surviving spouse is not a U.S. citizen, the U.S. government has no authority to tax him or her on assets that are not located in the U.S.  Therefore, because the non-U.S. citizen surviving spouse could easily take all of the assets and move back to his or her native country, it is not reasonably certain that the assets left to the surviving spouse by the deceased spouse will be subject to estate taxes as part of the surviving spouse’s estate.

Application of this rule can be quite harsh, especially where the surviving spouse has no intention of taking the assets back to their native country.  For this reason, provisions have been carved out in the Internal Revenue Code for a special kind of trust called a QDOT (Qualified Domestic Trust).  Assets passing from the deceased spouse to a properly designed QDOT qualify for the unlimited marital deduction.  Income from assets in the QDOT can be used to support the surviving spouse.  However, any principal distributed to the surviving spouse from the trust will be subject to estate taxes (exceptions apply for principal distributions for health, education and support in circumstances of financial need).

In order for a trust to qualify as a QDOT for estate tax purposes, there are some very strict requirements, particularly regarding who the trustee is and what types of assets may comprise the trust property.  If you are interested in setting up a provision in your estate plan, you should consult with an experienced estate planning attorney to make sure you don’t run afoul of the complex tax laws implicated in this strategy.

For additional reading:

Estate Planning for Your Unique Family Circumstances

QTIP Trusts (Marital Trusts)

 

Tags: , , , , , , , ,

No comments yet.

Leave a Reply

Name (required)

Email (will not be published) (required)

Website