Transfers to Noncitizen Spouses (Portfolio 842)
This Portfolio addresses tax planning for gratuitous transfers of property to a spouse who is not a U.S. citizen.
Tax Management Portfolio, Transfers to Noncitizen Spouses, No. 842, addresses tax planning for gratuitous transfers of property to a spouse who is not a U.S. citizen. Since 1988, the estate and gift tax marital deductions have been disallowed by §§2056(d) and 2523(i) for transfers of property to a spouse who is not a U.S. citizen. Such transfers, whether made by gift or bequest, are fully subject to U.S. transfer taxes.
Before 1988, a transferor subject to U.S. gift or estate tax was entitled to a 100% marital deduction for transfers to his or her spouse, regardless of the spouse’s citizenship. This deduction was withdrawn by the Technical and Miscellaneous Revenue Act of 1988 with respect to transfers to noncitizen spouses, generally effective for transfers made after November 10, 1988. For purposes of the estate tax, the 1988 Act allowed a limited exception to this rule if the property passed to a qualified domestic trust (QDOT) for the benefit of the surviving spouse. Transfers to a QDOT qualify for the marital deduction, while distributions of principal from the QDOT are subject to estate tax. The portfolio describes the policy reasons behind the 1988 legislation and includes copies of the legislative reports. The portfolio also discusses the impact of the Tax Relief Act of 2010, which retroactively reenacted the estate and generation-skipping transfer taxes after their 2010 repeal under the Economic Growth and Tax Relief Reconciliation Act of 2001, on transfers to noncitizen spouses.
Because a transfer to a QDOT provides the sole means of deferring estate tax on bequests to a noncitizen spouse, the portfolio focuses on the QDOT requirements, found primarily in the regulations. In order to qualify for the marital deduction, property must pass directly from the estate to a QDOT, with two limited exceptions. The first allows property passing to the spouse to be placed in a QDOT within nine months of the decedent’s death, while the second allows QDOT treatment to certain types of property, such as retirement plans, that cannot be transferred to a QDOT.
The portfolio also discusses in detail the guidelines for who may qualify as a QDOT trustee, as well as the security requirements that ensure that estate tax will be paid on distributions of principal from a QDOT. In addition, the portfolio describes the exceptions to the security requirements for small QDOTs and for QDOTs holding the personal residence of the QDOT beneficiary.
Finally, there is a discussion of the disallowance of the gift tax marital deduction for gifts to noncitizen spouses. The portfolio also addresses the $100,000 annual exclusion for gifts to noncitizen spouses and the special tax rules for joint tenancy property held with a spouse who is not a U.S. citizen.
This portfolio may be cited as Siegler, 842 T.M., Transfers to Noncitizen Spouses.
Table of Contents
II. Disallowance of Federal Estate Tax Marital Deduction
III. Qualification as a QDOT
IV. When Is Qualification as a QDOT Determined? – Provisions for Reformation
V. Transfers by the Surviving Spouse of Outright Bequests and Nonprobate Property to a QDOT
VI. Special Rules for Nonassignable Annuities and Other Arrangements
VII. Taxation of QDOTs
VIII. Death of the Noncitizen Surviving Spouse
IX. Federal Gift Tax on Transfers to Noncitizen Spouses
X. Effect of Changes in the Federal Gift and Estate Tax Marital Deduction on Existing U.S. Tax Treaties
XI. Effective Date Provisions
XII. Planning for the Marital Deduction for Noncitizen Spouses