In most situations, a person leaving money to their spouse has what is called an unlimited marital deduction. This means that there is no limit on assets that will be taxed from one spouse to another so long as the surviving spouse is actually a legal spouse, receives the money, and in most cases, is a U.S. citizen.
However, unlimited amounts may not be left to non-citizen spouses because the government is concerned that in the event that the surviving spouse were to receive the funds without any tax, he or she could leave the country and the U.S. government will never have their chance to tax these assets for estate tax purposes. Therefore, there are limitations on the amount that a non-U.S. citizen surviving spouse may receive without any estate taxes.
With good planning, there is a Trust that may be utilized to provide the non-citizen spouse with funds after the death of the U.S. citizen spouse, called a Qualified Domestic Trust (QDOT.) When this Trust is in existence, the estate tax deduction and marital deduction may be utilized to defer taxes until the death of the surviving spouse.
When planning was not completed before the death of the citizen spouse, it is possible that a significant tax may be due. In this case, there may be an alternative. The surviving spouse may then petition the immigration service to become a U.S. citizen. If this occurs prior to the filing of the estate tax return, which is normally due within nine months of date of death unless an extension is obtained, changing of the status of the surviving spouse to that of a U.S. citizen will negate the unfortunate tax ramifications.
If this is not an option due to choice or because the time limitations have already expired, then in the event that the first spouse to die had established a Trust, it is possible to file a petition with the court of competent jurisdiction to amend the Trust and reform it to qualify as a Qualified Domestic Trust. If this is the case, then the Trustee of the QDOT must be a U.S. Citizen or a U.S. Trust entity, as that person or entity is personally responsible for filing tax returns and withholding taxes when necessary. The Government wants to ensure that anyone responsible for the tax liability on this exception in the tax code meets their requirements and that the government has the ability to pursue them in the event that the trustee does not pay the required taxes.
There are also significant limitations on the transfer of funds from a citizen spouse to a non-citizen spouse during lifetime, and it is important to track these transfers for current as well as future gift and estate tax consequences.
It is usually a better tax result when both spouses are US citizens, but sometimes, one spouse elects to return to their native country and does not wish to become a U.S. citizen. This is certainly an option, but the tax effects should be reviewed prior to making that decision.
By: Hyman G. Darling, Esq.