Non-citizen Spouses and Estate Planning

An estate left to a surviving spouse is not subject to federal estate tax, as long as the surviving spouse is a United States citizen. The unlimited marital deduction is inapplicable when the surviving spouse is not a U.S. citizen, even if the spouse is a permanent U.S. resident.  Congress is concerned about a noncitizen spouse moving to another country and avoiding the U.S. gift and estate taxes.  Remember - you can leave assets worth up to the exempt amount ($5.25 million for deaths in 2013) to anyone, including your noncitizen spouse, without owing any federal estate tax. If the noncitizen spouse dies first, assets left to the citizen spouse still qualify for the unlimited marital deduction.

If your spouse is a noncitizen, there are three strategies to consider.  First, the noncitizen spouse may become a citizen.  If your noncitizen spouse becomes a U.S. citizen by the time the estate’s federal estate tax is due (typically nine months after death), your spouse will qualify for the unlimited martial deduction.  The second option is to create a systematic gifting program.  If your spouse is a citizen, any gifts you give to that spouse during your life are free of federal gift tax.  If your spouse is not a U.S. citizen, however, the special tax-free treatment for spouses is limited to $143,000 a year.  (This amount is indexed for inflation.).

The third option is to form a “Qualified Domestic Trust.” (QDOT).    You can leave property to the trust, instead of directly to your noncitizen spouse. Your spouse is the beneficiary of the trust, and there cannot be any other beneficiaries while your spouse is alive. The noncitizen spouse cannot be the sole trustee.  The co-trustee or sole trustee must be a U.S. citizen or a U.S. corporation. If the amount of trust assets exceeds $2 million, one of the trustees must be a U.S. bank.  If it is not a U.S. bank, the trustee must put up bonds for much of the trust’s value.  Your spouse would receive income the trust property generates, which is not subject to estate tax, but is subject to income tax.  With an exception based on need, if trust assets themselves are distributed to your spouse, the estate tax will probably have to be paid on that property.  

With a QDOT, assets go to the trust instead of to the surviving noncitizen spouse. The survivor receives benefits (such as interest generated by the trust) from the trust assets, but does not own them. When the second spouse dies, assets pass to other beneficiaries named in the trust document. If the estate is valuable enough, estate tax is paid then, as if the assets were in the estate of the first spouse to die. Trust assets are not included in the estate of the second spouse to die.