Noncitizen Spouses May Face Unexpected Estate and Gift Taxes

Date: January 1992

Recent changes in the federal tax law can dramatically affect the estate and gift taxes required to be paid by a noncitizen spouse at the time he or she receives property from his or her citizen spouse.

Once upon a time, a U.S. citizen spouse could make gifts to his or her noncitizen spouse during lifetime or at death without paying any federal gift or estate tax. For quite some time these nontaxable transfers were acceptable to the federal government, for it anticipated that it would collect estate tax on the gifted assets from the noncitizen spouse when he or she died. Later, however, Congress realized that it wasn’t collecting as much estate tax as it anticipated because some noncitizen spouses took their gifted assets abroad, where the government had no power to tax the noncitizen spouse. Congress then acted to close this loophole.

Currently, it is still possible to defer gift and estate tax on transfers to a noncitizen spouse, However, in order to qualify for the deferment the transfers must be made to a “Qualified Domestic Trust” (“QDT”) established for the noncitizen spouse.

A QDT resembles the conventional marital trust typically employed in estate plans. Income is paid to the noncitizen spouse for his or her lifetime, and principal may be paid to the noncitizen spouse as desired. The critical difference between  a conventional marital trust and the QDT lies in the trustee requirement. The QDT must have a U.S. citizen or U.S. corporation trustee serving at all times. However, if desired, the noncitizen spouse may serve as co-trustee along with the U.S. citizen/corporation trustee. By requiring that a U.S. person or corporation serve as trustee, Congress helps ensure that QDT assets will remain in the United States until the noncitizen spouse’s death, when estate tax may be imposed.

If your spouse is not a U.S. citizen and you have not revised your gift or estate plan so as to comply with the QDT requirements, substantial gift and estate taxes might be incurred. With a properly-drafted QDT, such estate and gift taxes can be deferred.

For further information on the QDT, recent federal estate tax law changes, or your overall personal estate plan, please call our Trusts and Estates Department at (310) 858-7700.

Our Trusts and Estates Department offers a wide range of estate planning and probate services geared to provide an orderly transfer of wealth from one generation to another. We prepare wills and trusts, deal with real property issues, and furnish sophisticated lifetime and postmortem tax planning. We also provide counsel to executors and trustees on the administration of estates and trusts, and we provide skilled representation in probate, trust and conservatorship proceedings and disputes.

Rosenfeld, Meyer & Susman was founded in 1957. The firm’s areas of expertise include: Trusts and Estates, Litigation, Taxation,  Entertainment, Corporate and Securities, Family Law, Labor and Employment Law, Insurance Coverage and Defense, Real Estate, Multimedia, Intellectual Property and Employee Benefits.

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