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Non-Citizen Spouses

     More U.S. citizens are marrying foreign national spouses as a natural consequence of international travel, study and commerce. These marriages specifically enrich both families and generally enrich the great "melting pot" which is the United States of America. However, without proper planning, such marriages could unintentionally and unnecessarily enrich the IRS.
     When a marriage is between U.S. citizens, each spouse may give away during life or pass at death an unlimited amount of assets to one another. This is called, appropriately, the unlimited marital deduction. However, rather complex special estate and gift tax rules apply to transfers of assets from a U.S. citizen spouse to a non-citizen spouse. Failure to comply with these rules can be expensive.

Lifetime Giving

     A U.S. citizen may give up to $125,000 each year free of gift taxes to their non-citizen spouse. Any amount exceeding that protected threshold is subject to gift taxes. This rule is clear and easy to understand. The rules for post-mortem transfers, on the other hand, are complex, especially for estates exceeding the applicable estate tax exemption amount (e.g., currently $2 million).

Post-Mortem Transfers

     General rule: If the estate of a U.S. citizen passing to their non-citizen surviving spouse exceeds the applicable estate tax exemption amount, then the amount in excess will not qualify for the unlimited marital deduction. Exception: If the non-citizen spouse becomes a U.S. citizen before the estate tax return is due (within nine months of death), or if the estate passing to the non-citizen spouse is held in a Qualified Domestic Trust (QDOT), then estate taxes will not be triggered on the excess upon the death of the U.S. citizen spouse. [Note: Up to $600,000 of the value of the personal residence and its contents may be excluded when determining whether the applicable estate tax exemption has been reached.] The underlying purpose of requiring use of the QDOT is to ensure collection of the estate tax on the death of the non-citizen spouse (who otherwise could remove the assets from the United States and deprive the IRS of its eventual inheritance).

QDOT Requirements

     The rules governing QDOTs are set forth in Internal Revenue Code Section 2056A(a) and related Treasury Regulations. Here are just a few highlights:

• At least one trustee of the QDOT must be a U.S. citizen or a domestic corporation.
• While QDOT trust income distributed to a non-citizen spouse is not subject to the QDOT tax, distributions of principal will be subject to federal estate taxes (unless made due to a qualifying hardship).
• The U.S. trustee must be able to withhold taxes due on any trust principal distributions.

     Bottom line: The lifetime or post-mortem transfer of assets to a non-citizen spouse can be an unnecessarily taxing experience. Seek appropriate legal counsel to limit such experience.