One of the most important estate tax planning tools available to married couples in the United States is the unlimited marital deduction, which allows one spouse to pass assets of any value to the other spouse without having to pay any Federal estate tax. Married couples generally used the unlimited marital deduction to defer estate taxes until the death of the surviving spouse. But what happens if the surviving spouse is not a U.S. citizen?
Resident aliens are generally subject to Federal estate tax in the same way U.S. citizens are. That is, U.S. estate tax laws apply to all property of U.S. citizens and U.S. residents, wherever that property is located in the world.
However, the marital deduction is not allowed if the spouse receiving property is not a U.S. citizen, even if he or she is a permanent resident of the United States. If the surviving spouse is not a U.S. citizen, transfers for the benefit of the surviving spouse will only qualify for the unlimited marital deduction if they are made to a qualified domestic trust (QDOT).
Essentially, a QDOT is a marital trust designed to allow the non-citizen spouse to take advantage of the estate tax marital deduction. All the income of the trust must be paid to the surviving spouse, and the surviving spouse can receive principal in the discretion of the trustee, but any distributions of principal to the surviving spouse are subject to estate tax. When the surviving spouse dies, the estate tax is paid and any remaining principal is distributed as directed in the trust document.
A QDOT can be set up by the first spouse to die in a Will or revocable trust or it can be set up by the surviving spouse soon after the death of the first spouse to die.
The tax laws require numerous highly technical provisions to be included in a QDOT, so be sure to consult an experienced attorney if you are considering this type of trust.
If you’d like to learn more about a QDOT trust, please call Brian P. Jacobs at 661-290-2022.