A U.S. person is entitled to a 100 percent estate tax marital deduction for assets left to his or her surviving spouse if the spouse is a U.S. citizen. This applies also to an NRA who leaves U.S. situs assets to the surviving U.S. citizen spouse. However, in either case, if the surviving spouse is not a U.S. citizen, the estate tax marital deduction is not available unless the assets pass to a qualified domestic trust (QDT). (IRC § 2056 (d)(2)(A))
To qualify, a QDT must meet the following requirements:
1. The trust must pay all income to the surviving spouse for life.
2. The trust may not permit principal distributions to anyone other than the surviving spouse during his or her life. Any principal distributions to the surviving spouse (except distributions for hardship) will be subject to estate tax at the time of distribution at the top bracket of the deceased spouse's estate. The remaining principal in the trust on the death of the second spouse will also be subject to estate tax on the estate of the first spouse.
3. The trust must have at least one U.S. trustee, and the U.S. trustee or trustees must have the power to withhold estate tax on any such distribution.
4. For trusts of more than $2 million, there must be either a U.S. institutional trustee (a U.S. bank or U.S. branch of a foreign bank) or the posting of a bond or letter of credit in an amount equal to 65 percent of the initial value of the trust assets. In determining whether the trust has more than $2 million in assets, and also in determining the amount of the bond or letter of credit, there is an exclusion for up to $600,000 of real property (not, apparently, cooperative apartments) constituting one or two residences and their contents used by the surviving spouse. (Treas. Reg. § 20.2056A-2(d)(1)(iv))
5. For trusts of $2 million or less, if more than 65 percent of the trust assets constitute offshore real property, there must be either a U.S. institutional trustee or the posting of a bond or letter of credit in an amount equal to 65 percent of the initial value of the trust assets. (Proposed Treas. Reg. § 1.015-5(d)) No partial marital deduction election may be made over a QDT.
Assets owned jointly with a noncitizen spouse are fully includible in the estate of the first spouse to die, except to the extent that the surviving spouse can prove contribution to the property.
Outright bequests to a noncitizen spouse will qualify for the marital deduction without the need for a QDT if the surviving spouse becomes a U.S. citizen before the decedent's estate tax return is filed. If the surviving spouse becomes a U.S. citizen at any time after the return is filed, the QDT can be terminated and all assets paid outright to the surviving spouse, but any principal distributions that were made to the spouse prior to becoming a citizen will be taxed.
Gifts to Noncitizen Spouse
A U.S. person or an NRA may make unlimited gifts to his or her U.S. citizen spouse without gift tax consequences. However, if the donee spouse is a non-U.S. citizen (regardless of whether or not the donee spouse is a U.S. citizen or resident), the donor spouse may give up to only $155,000 (2019 amount) per year to the donee spouse without gift tax consequences . These annual gifts must be either outright or in a trust that qualifies them as gifts of a present interest. They must also be in a form that would qualify for the marital deduction if the spouse were a U.S. person. Any gifts in excess of this amount will be subject to gift tax, although the unified credit is available if the donor spouse is a U.S. citizen or resident. (IRC § 2523(i)(2))
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