United States: Transfers To Non-Citizen Spouses: Planning Considerations

Estate planning professionals commonly encounter married couples with mixed nationalities. That is, one spouse is an American citizen and the other is not. The U.S. estate and gift tax rules are generally the same for U.S. citizens and resident aliens. However, the estate tax marital deduction differs significantly as applied to non-U.S.-citizen surviving spouses.

The unlimited gift and estate tax marital deduction generally allows U.S. citizens and U.S. resident non-citizens to make unlimited transfers of property to their U.S. citizen spouses, whether during lifetime or at death, without gift or estate tax consequences. The marital deduction defers estate tax on assets passing to a surviving spouse until his or her death. However, the unlimited estate tax marital deduction does not apply to gifts to a surviving spouse who is not a U.S. citizen. Therefore, the resulting amount of estate tax liability can be significantly increased for those with non-U.S. citizen surviving spouses.

Given this background, estate planners should be aware of several planning methods to help mixed-nationality couples minimize their tax liability.

1. Maximize Lifetime Gifts.

Lifetime gifts to non-citizen spouses are eligible for a special annual exclusion of $145,000 (for calendar year 2014, indexed for inflation). A gift qualifies for this annual exclusion if the gift: (1) passes a present interest, and (2) would otherwise qualify for the marital deduction for lifetime gifts if the donee spouse were a U.S. citizen.

Following the gift, there are several ways in which the non-citizen spouse may avoid or minimize U.S. estate tax. First, if the non-citizen spouse resides in the U.S. at the time of the gift, then he or she can avoid U.S. estate tax by removing the property from the U.S. and establishing residence outside of the U.S. before the time of his or her death. Second, a non-citizen spouse who resides in the U.S. may also use his or her applicable exclusion amount (currently $5.34 million) to reduce the estate tax on all property included in his or her estate (an advantage not available for assets transferred to a QDOT, discussed below). Third, if the non-citizen spouse does not reside in the U.S. at the time of the gift (for example, the non-resident, non-citizen spouse of a U.S. citizen domiciled abroad), he or she will avoid U.S. estate tax entirely, unless the gifted property is sitused in the United States at the non-citizen spouse's death.

Mixed-nationality couples may also minimize transfer taxes by using the special annual exclusion to make lifetime gifts of jointly held property to the non-citizen spouse. The transfer of jointly held property from a U.S. citizen to a non-U.S.-citizen spouse may be subject to gift tax when the non-citizen spouse ultimately sells or otherwise transfers the property. The gift tax applies to such transfers to the extent the non-citizen spouse receives proceeds in excess of his or her proportionate share, if any, paid to acquire the property. By strategically utilizing the special annual exclusion, the U.S.-citizen spouse can gift joint property over time and avoid the imposition of gift tax when the non-citizen spouse later sells or otherwise transfers the property.

2. Utilize a Qualified Domestic Trust (QDOT).

Although the unlimited marital deduction is generally not allowed for transfers to non-citizen spouses, an exception exists for property transferred from the estate of a U.S. citizen or U.S. resident non-citizen to a QDOT for the benefit of his or her surviving non-citizen spouse. The QDOT rules allow a marital deduction and provide a jurisdictional basis to tax the property in the QDOT if the surviving spouse does not become a U.S. resident or leaves the United States.

A QDOT must meet the following requirements:

  1. The trust instrument must require that at least one trustee of the trust be a U.S. citizen or domestic corporation, unless this requirement is waived by the IRS.
  2. The trust instrument must provide that no distribution (other than distribution of income) may be made unless the U.S. trustee has the right to withhold the estate tax imposed on the distribution.
  3. The trust must meet the requirements of any rules issued to ensure the collection of the estate tax imposed on the trust. These rules generally apply if the QDOT holds property in excess of $2 million or foreign property which has a fair market greater than 35% of the QDOT.
  4. The executor must irrevocably elect QDOT treatment for the trust on the last federal estate tax return filed before the due date (including extensions). Alternatively, if a timely return is not filed, the election must be made on the first federal estate tax return filed less than one year after the due date for such return, including extensions.

Even if a decedent did not create a QDOT as a part of his or her estate plan, a surviving spouse can create a QDOT to defer estate taxes. In doing so, the surviving spouse must transfer the property to the QDOT before the decedent's estate tax return is filed. It is important to note that the transfer of property by the surviving spouse to the QDOT could be subject to gift tax if (1) the surviving spouse is a U.S. resident, or (2) the transfer involves property with a U.S. situs. In such cases, care must be taken to avoid a completed gift on the transfer. Planners can avoid a completed gift by giving the surviving spouse a testamentary power of appointment over the QDOT property.

A QDOT defers estate taxes until principal is distributed from the trust to the surviving spouse, or until the surviving spouse's death. Whenever principal is distributed from a QDOT, the amount of the distribution is added back to the decedent spouse's estate and taxed at the rates effective on his or her death. This results in a tax equivalent to the highest marginal rate applicable at the first spouse's death. However, principal distributions made as a result of an immediate and financial "hardship" of the surviving spouse, or of those he or she is legally obligated to support, are not subject to the QDOT estate tax.

When the surviving spouse dies or the trust fails to meet the QDOT requirements, the estate tax applicable at the deceased spouse's death is recalculated by including the remaining QDOT property in the deceased spouse's taxable estate. The prospect of redetermining the deceased spouse's estate tax undermines the surviving spouse's ability to make large lifetime gifts in reliance on the deceased spouse's unused exemption amount (DSUE), if any, because the DSUE is "redetermined" at each taxable event rather than being fixed at the deceased spouse's death.

3. Surviving Spouse Becomes a U.S. Citizen.

A non-citizen surviving spouse can take advantage of the unlimited marital deduction if he or she meets two conditions. First, the surviving spouse must become a U.S. citizen before the due date of the deceased spouse's estate tax return. Second, the surviving spouse must have been a U.S resident at all times from the date of the deceased spouse's death until the date he or she obtains citizenship. If citizenship remains pending at the time the estate tax return is filed, it may be advisable to file a protective QDOT election because such election must be made no later than one year after the due date for the U.S. estate tax return.

Additionally, if a QDOT has been established, the estate tax imposed on QDOT distributions will cease if the surviving spouse later becomes a U.S. citizen and either (1) has been a U.S. resident at all times after the decedent's death until obtaining citizenship, or (2) has not been a U.S. resident but has received no taxable distributions from the trust. The trustee must timely notify the IRS of the change in the surviving spouse's citizenship status for these rules to apply.

Mixed-nationality couples present unique estate planning considerations, and such couples can benefit greatly from advance planning. The strategies described above enable mixed-nationality couples to minimize their estate and gift taxes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions