Tax Article - Special Planning Needed for Transfers to a Non-Citizen Spouse

In general, our gift and estate tax laws allow unlimited tax-free transfers between spouses. The catch is that the transferee spouse (the one receiving the property) must be a U.S. citizen. This so called "Marital Deduction" views the married couple as one economic unit applying the theory that only transfers outside the unit (i.e., to children) should be subject to a transfer tax. Transfers involving a non-citizen spouse (even permanent residents) require special planning to preserve family wealth.

Lifetime Transfers

Under current law, you may transfer to your non-citizen spouse up to $117,000 (for 2005) annually. This amount is indexed for inflation and increases in $1,000 increments. When enacted, the amount was $100,000.

Transfer at Death

The benefit of the marital deduction for estate tax purposes can be achieved by the surviving non-citizen spouse in three ways:

Becoming a citizen of the United States before the estate tax return is filed (due nine months after the date of death). This may be an impractical (timing) solution.

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By having property pass from the decedent to the surviving non-citizen spouse in a qualified domestic trust (QDOT). A QDOT has several requirements, which, if met, provide for the deferral of the estate tax until a "taxable event" occurs. Taxable events are usually:

a. Death of the non-citizen spouse.
b. Distribution of principal.
c. Termination of the trust's QDOT status.

Essentially, the QDOT is a trust designed to allow the non-citizen spouse to take advantage of the estate tax marital deduction. In practice, all the income is paid to the surviving spouse (subject to income, but not estate tax). When the non-citizen spouse dies, the estate tax is paid and any remaining principal is distributed as directed in the trust document, usually to the children.

By the surviving non-citizen spouse disclaiming property left outright to him or her thereby having the property fund a QDOT. This must be done within nine months of the decedent spouse's death.

This is a very complex area of transfer tax planning. We would be happy to assist you in these matters.

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