Non-U.S. Citizen Planning
Our lives are global. U.S. citizens often marry people who are citizens from other countries and not citizens from the U.S. That requires special planning to protect assets from tax and to ensure that the surviving spouse maintains full use of the couples assets. It requires practical consideration when selecting agents and fiduciaries. Care must be taken when the laws of multiple countries may apply to an estate.
For purposes of determining estate tax owed to the United States federal government only, there is no marital deduction unless assets are placed in a Qualified Domestic Trust. (“QDOT”). If there is QDOT in place, then the all of the assets of the deceased spouse may pass to the surviving spouse estate tax free. The QDOT is the government's way of ensuring that the assets do not leave the country without estate tax being paid. The trustee for the QDOT is liable for the taxes owed on the estate when the surviving spouse dies. Initially, the QDOT must have at least one trustee who is an individual U.S. citizen or a domestic corporation. Selection of that trustee is an important decision. TheTrustee of the estate must make an irrevocable QDOT election to qualify for the marital deduction on the federal estate tax return within 9 months from the date of death. If QDOT assets are less than 2 million, and no more than 35% of QDOT assets are in real property, then the trustee may be an individual who is a U.S. citizen. Otherwise, the U.S. Trustee must be a bank; or the individual U.S. trustee must furnish a bond for 65% of the value of the QDOT assets at the transferor’s demise; or the individual U.S. Trustee must furnish an irrevocable letter of credit to the U.S. Government for 65% of the value.
Without the QDOT, the Non-Resident Alien Estate Tax only allows for a $60,000 exemption which applies to U.S. property only. The remaining estate is subject to estate tax. The annual exclusion for gifts made to a non-citizen spouse in 2011 are for amounts up to $136,000. After that, gift taxes may apply.
When considering that the federal government will tax estates on the death of the first spouse, it makes sense for non-U.S. citizens to incorporate QDOT planning into their estate plans. Another consideration is that for estates that are less than the exemption, no QDOT is needed because no federal estate tax will be due. However, with the ever changing decisions by the current Congress, having a QDOT in place is a safety net to preserve assets for the loved ones you want to receive them instead of the United States government.
I would be pleased to consult with you regarding your particular situation.