United States: Transfer Tax Rules For The Non-Citizen Spouse

Transferring wealth to a spouse who isn't a U.S. citizen can create complex gift, estate and generation-skipping transfer tax challenges. Such transfer tax issues require careful planning, as well as a clear understanding of the differences in how citizens and non-citizens are taxed.

Unlike citizens and resident aliens, a non-resident alien must only pay transfer taxes on assets having a situs in the United States.  Since the gross estate of such individuals is limited to U.S. situs assets, the exemption against estate tax is restricted, and deductions from the gross estate must be allocated.

Also, be aware that for federal transfer tax purposes, the term "resident" is defined differently than for income taxes.

For purposes of federal transfer taxes, the term "resident" means an individual domiciled in the United States -- a meaning that is not identical to the meaning of the same term in the income tax context.  For income tax purposes, a taxpayer may have a dual residence, while a taxpayer can have only a single true domicile for transfer tax purposes.  Determination of domicile is based on subjective review of a number of factors.  The ultimate concern is whether the individual intends to remain in the United States for an indefinite period.            

Because most countries will assert tax jurisdiction over their own citizens and residents with respect to the entire estate worldwide, and will also assert jurisdiction over assets having a situs within their borders, there is a great potential for double taxation when dealing with international clients. 

For example, a resident alien having a domicile in the United States may also be subject to tax by the country of which he or she is a citizen, and may be subject to additional tax if real estate is owned in a third jurisdiction.  Such conflicts are generally dealt with under treaties entered into by the respective jurisdictions.  Two primary types of estate tax treaties exist: 

 If an estate is subject to taxation on worldwide assets by more than one country, then each country will allow a tax credit on property physically located in the other country. 

  1. If an individual is viewed as a domiciliary of two countries, he or she will be treated as a domiciliary of the country of citizenship if residence was established in the non-citizenship country less than a specific number of years prior to death.  If the double domicile dispute cannot be settled by the number of years rule, the treaties contain other means of determining domicile. 

The tax treaty provisions are complex, and vary for each country.  Transfer tax planning for non-citizens cannot be carried out until all applicable treaties have been examined.

Where assets are located outside the United States, it will be necessary to examine the testamentary formalities required to effectuate a transfer of the foreign situs property at death.  The country where assets are located will generally exercise ultimate control over those assets, although courts and legal authorities in other jurisdictions may attempt to assert jurisdiction.  Sometimes, a jurisdiction may exercise indirect control over assets located elsewhere if the forum country has control over the interested parties.  Even when it is determined which country has control over specific assets, it is not clear that that country's law will necessarily apply.  The choice of law rules applied by the forum nation must be consulted.  These rules are rarely clear.  Foreign counsel may need to be consulted in order to assure that the estate plan is properly carried out.

Multijurisdictional wills may help prevent such confusion. In addition, careful consideration should be given to the use of diverse types of vehicles to hold assets.  Use of corporate, trust and other entities may be helpful in collecting assets, avoiding probate in a multitude of jurisdictions, and pinning down questions of situs and choice of law.

Basic Rule:  Marital Deduction Disallowed. 

In 1988, Congress chose to disallow the marital deduction for transfers to non-citizen spouses, except under strictly controlled circumstances. 

One of those circumstances is when the property passes into, or is promptly transferred by the surviving spouse to, a Qualified Domestic Trust ("QDOT").  A narrow exception is available where the surviving spouse becomes a citizen before the filing of the estate tax return, and was a resident of the United States at all times between the decedent's death and the attainment of citizenship status. 

No marital deduction is allowed for lifetime transfers to a non-citizen spouse.  The qualified domestic trust exception is not available.  However, for gifts to a non-citizen spouse which would otherwise qualify for the marital deduction, a special annual exclusion limitation of $100,000 indexed for inflation ($149,000 in 2017), instead of the normal $14,000, is made available each calendar year, for gifts other than future interest gifts. 

Where property is titled jointly with right of survivorship or tenants by the entireties and one of the spouses is a non-citizen, the "consideration furnished" test must be applied to determine whether and to what extent jointly-owned property will be included in the estate of the first spouse to die if the surviving spouse is not a U.S. citizen.  The portion of the jointly-owned property includible in the estate will not be eligible for the marital deduction. 

Legislative Solution:  Qualified Domestic Trust. 

Transfers at death to a non-citizen spouse will qualify for the marital deduction to the extent that the assets pass from the decedent, or are promptly transferred by the surviving spouse, to a QDOT meeting the following requirements.

1) At least one trustee of the trust be an individual citizen of the United States or a domestic corporation.

2) No distribution (other than a distribution of income to the spouse) may be made unless the U.S. trustee has the right to withhold the QDOT tax from the distribution.

3) The trust instrument must also comply with regulatory requirements designed to ensure the collection of the QDOT tax. 

Please note: A QDOT will qualify as such only if the executor elects QDOT treatment on the estate tax return.

Distributions made to the spouse from a QDOT are generally treated as taxable events.  However, no QDOT tax is imposed upon the distribution of income.  For this purpose, capital gains may not be treated as income, unless they would be so treated under prevailing state law principles, regardless of the provisions of the trust instrument.  Principal distributions made to the spouse on account of "hardship" are also exempt from the QDOT tax.  The distribution will be exempt only if other resources are not available to satisfy the spouse's need.  

If the trust ceases to qualify as a QDOT at any time, as, for example, in the situation where there is no U.S. trustee, the entire value of the trust corpus will be subject to tax. 

Since the property passing into the QDOT is eligible for the marital deduction, in most cases the property will be subject to taxation at the surviving spouse's death as part of his or her own estate and will receive a stepped-up basis.  

Additional QDOT tax may be avoided if the surviving spouse becomes a citizen of the United States after the establishment of a QDOT. 

If the spouse was at all times a resident of the United States between the date of death and the date of attainment of citizenship, or if no taxable distributions have been made from the QDOT prior to the attainment of citizenship (regardless of the residency status of the spouse), then upon attaining citizenship, the QDOT tax will no longer be imposed.  If a QDOT tax has been imposed on prior distributions from the QDOT, and if the spouse was not at all times a resident of the United States, then the spouse must elect to treat the prior distributions as taxable gifts for purposes of determining the appropriate transfer tax rate and available unified credit for the spouse's future gifts and for the spouse's estate at death.  If the decedent spouse's exemption was allowed against the prior distributions, the surviving spouse must reduce his or her exemption by a like amount.  Future QDOT tax will be avoided if this election is made.

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
Check to state you have read and
agree to our Terms and Conditions

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.

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 by clicking here .

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.

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.