The estate tax marital deduction allows U.S. taxpayers to transfer an unlimited amount of assets to their U.S. citizen spouses free of gift and estate taxes. These transfers can be made through lifetime gifts or bequests at death.

However, if you’re a U.S. citizen and transfer assets to a noncitizen spouse, there may be immediate tax consequences. This can be true even if your spouse is a permanent resident. You may still be able to take advantage of the estate tax marital deduction by using a qualified domestic trust (QDOT).

The Basics

A special marital deduction is allowed for assets that pass to a QDOT. This type of trust is typically created in a will or a separate trust document before the citizen spouse’s death. However, there’s some flexibility to these rules. The executor of your estate or your surviving spouse can create a QDOT within certain time limits, even after your death.

Once your assets are transferred to the trust, your surviving spouse can receive income from the trust estate tax-free. Distributions of principal to your spouse, however, will be subject to estate taxes, and the trustee must withhold funds equal to the amount of tax.

There may be other estate tax considerations for when the trust terminates or other distributions are made, so it’s important to work closely with qualified professional advisors when creating and operating the trust.

Additional Rules

For transfers to a QDOT to qualify for the estate tax marital deduction, the QDOT must have at least one trustee who’s a U.S. citizen or a domestic corporation. This could be a bank or trust company.

The trust also needs to require the trustee to approve all principal distributions. In addition, it must be designated as a QDOT by an election on the U.S. citizen spouse’s federal estate tax return and retain enough property in the United States to cover any estate tax payable at the noncitizen spouse’s death.

If the QDOT’s assets are worth more than $2 million at the death of the first spouse, the U.S. trustee must be a domestic bank or, alternatively, the individual U.S. trustee must furnish the IRS with a bond or letter of credit in an amount equal to 65% of the QDOT’s value.

Next Steps

Estate planning is a little more complicated for U.S. citizens with noncitizen spouses. But don’t let that stop you from pursuing all the tax-savvy options open to you. Contact Moore Doeren Mayhew's advisors to help you set up the most tax advantageous estate plan.