Gift and estate taxation: noncitizen spouse issues.

• Author: Doiron, Daniel P.

U.S. gift and estate taxes constitute a unified transfer tax on accumulated wealth. Special considerations are necessary when a noncitizen is involved in an estate and gift tax plan. Specifically, when a spouse is not a U.S. citizen, the availability of a marital deduction for both gift and estate tax purposes may be limited. When developing a gift and estate tax plan, citizenship and residency information is critical.

Gift taxes

Gifts of property by U.S. citizens and resident aliens are subject to gift tax. Under Sec. 2523(a), a marital deduction equal to the property's value is allowed for gifts of property between spouses. However, under Sec. 2523(i), the marital deduction is not available where the donee spouse is not a U.S. citizen. Sec. 2523 provides some relief, via a $100,000 annual exclusion for gifts to the alien spouse (instead of the usual $10,000 annual exclusion). Accordingly, gifts made to a non-U.S. citizen spouse must be monitored to ensure they remain within the $100,000 annual exclusion. Gifts in excess of $100,000 to a non-U.S. citizen spouse will be considered taxable gifts.

Estate taxes

Sec. 2001(a) imposes estate tax on U.S. citizens and residents. Similar to the gift tax marital deduction, Sec. 2056(a) provides for an unlimited marital deduction in computing the taxable estate of an individual when property passes to the surviving spouse. This deduction is allowed on the theory that the property received by the surviving spouse will be included in the spouse's estate at death. In this way the couple is treated as a single entity for estate tax, similar to the treatment for income tax purposes under Sec. 1041.

Like the gift tax rules, under Sec. 2056(d)(1) the estate tax marital deduction is not allowed when property passes to a surviving spouse who is not a U.S. citizen. This is intended to ensure that property passing to a non-U.S. citizen will eventually be subject to the Federal estate tax. Absent this provision, a decedent's estate could use the marital deduction and the non-U.S. citizen surviving spouse could remove the assets from the U.S. before death. This would avoid the U.S. estate tax at the spouse's death.

Sec. 2056(d)(2) provides a way to obtain the marital deduction for property passing to a non-U.S. citizen surviving spouse through the use of a qualified domestic trust (QDT). Under Sec. 2056A(a), a QDT has the following characteristics:

* The trust instrument must require at least one trustee to be...