Transfers to Noncitizen Spouses (Portfolio 842)

Tax Management Portfolio, Transfers to Noncitizen Spouses, No. 842-2nd, addresses tax planning for gratuitous transfers of property to a spouse who is not a U.S. citizen.

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Tax Management Portfolio, Transfers to Noncitizen Spouses, No. 842-2nd, addresses tax planning for gratuitous transfers of property to a spouse who is not a U.S. citizen. Since 1988, the estate and gift tax marital deductions have been disallowed by §§2056(d) and 2523(i) for transfers of property to a spouse who is not a U.S. citizen. Such transfers, whether made by gift or bequest, are fully subject to U.S. transfer taxes.
Before 1988, a transferor subject to U.S. gift or estate tax was entitled to a 100% marital deduction for transfers to his or her spouse, regardless of the spouse's citizenship. This deduction was withdrawn by the Technical and Miscellaneous Revenue Act of 1988 with respect to transfers to noncitizen spouses, generally effective for transfers made after November 10, 1988. For purposes of the estate tax, the 1988 Act allowed a limited exception to this rule if the property passed to a qualified domestic trust (QDOT) for the benefit of the surviving spouse. Transfers to a QDOT qualify for the marital deduction, while distributions of principal from the QDOT are subject to estate tax. The portfolio describes the policy reasons behind the 1988 legislation and includes copies of the legislative reports. The portfolio also discusses the impact of the Tax Relief Act of 2010, which retroactively reenacted the estate and generation-skipping transfer taxes after their 2010 repeal under the Economic Growth and Tax Relief Reconciliation Act of 2001, on transfers to noncitizen spouses.
Because a transfer to a QDOT provides the sole means of deferring estate tax on bequests to a noncitizen spouse, the portfolio focuses on the QDOT requirements, found primarily in the regulations. In order to qualify for the marital deduction, property must pass directly from the estate to a QDOT, with two limited exceptions. The first allows property passing to the spouse to be placed in a QDOT within nine months of the decedent's death, while the second allows QDOT treatment to certain types of property, such as retirement plans, that cannot be transferred to a QDOT.
The portfolio also discusses in detail the guidelines for who may qualify as a QDOT trustee, as well as the security requirements that ensure that estate tax will be paid on distributions of principal from a QDOT. In addition, the portfolio describes the exceptions to the security requirements for small QDOTs and for QDOTs holding the personal residence of the QDOT beneficiary.
Finally, there is a discussion of the disallowance of the gift tax marital deduction for gifts to noncitizen spouses. The portfolio also addresses the $100,000 annual exclusion for gifts to noncitizen spouses and the special tax rules for joint tenancy property held with a spouse who is not a U.S. citizen.
This portfolio may be cited as Siegler, 842-2nd T.M., Transfers to Noncitizen Spouses.

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Douglas L. Siegler, B.A., cum laude, Princeton University; J.D., with honors, Duke University School of Law; member, District of Columbia Bar and Maryland Bar; Fellow of the American College of Trust and Estate Counsel; American Bar Association Section of Taxation (Estate and Gift Tax Committee); frequent lecturer at various estate and tax planning seminars; author of numerous magazine and journal articles.
The author gratefully acknowledges the assistance of his late friend and partner Lloyd Leva Plaine in connection of this portfolio.


Detailed Analysis

I. Introduction

A. Prior Law

B. Background

1. Statutory Provisions

2. Proposed Regulations

3. Temporary and Final Regulations

II. Disallowance of Federal Estate Tax Marital Deduction

Introductory Material

A. General Rule

B. Treatment of Jointly Held Property (with Right of Survivorship) at Death

1. Rules Prior to TAMRA

2. Legislative and Regulatory Amendments

a. Limited Grandfathering Relief

b. Donee Spouse Dies First

c. Amount Required to Be Transferred to QDOT

d. Proof of Consideration Furnished

C. Allowance of Marital Deduction when Surviving Spouse Becomes a U.S. Citizen

III. Qualification as a QDOT

Introductory Material

A. In General

B. Marital Deduction Requirements

1. Property Passing Directly to a QDOT

2. Property Passing Outright to Surviving Noncitizen Spouse

3. Property Passing to the Noncitizen Surviving Spouse Under a Nontransferable Plan or Arrangement

C. Statutory Requirements

1. Trustee

a. Corporate Trustee

b. Individual Trustee

2. Withholding Requirement.

3. Election by Executor

a. Time Limitations

b. Partial QDOT Election

c. Protective QDOT Elections

4. Situs and Administration Requirements

5. Trust Requirement

D. Security Requirements for Collection of the QDOT Tax

1. Introduction

2. General Comments on the Regulations

a. Governing Instrument Requirements

b. Valuation and Indebtedness

c. Final Determination

3. Rules Governing Classification as Large QDOT or Small QDOT

a. General Rule

b. Audit Adjustments

c. Personal Residence Exclusion

4. QDOTs with Assets in Excess of $2 million

a. Bank Trustee Requirement

b. Bond Requirement

c. Letter of Credit Requirement

5. QDOTs with Assets of $2 Million or Less

a. Foreign Real Property Requirement

b. Look-Through Rules

6. Substantial Undervaluation Provisions

7. Anti-abuse rule

8. Request for Alternate Arrangement or Waiver

9. Adjustment of Dollar Threshold and Exclusion

10. Annual Reporting Requirements

a. When Required

b. Required Information

c. Time and Manner of Filing Statement

E. Miscellaneous QDOT Issues

1. Who May Create a QDOT?

2. Conflicts of Interest in Making the QDOT Election

3. QDOT as S Corporation Shareholder

4. Foreign Trust Status

a. Court Test

b. Control Test

IV. When Is Qualification as a QDOT Determined? - Provisions for Reformation

Introductory Material

A. General Rules

B. Limitations and Uses of Reformation Provisions

V. Transfers by the Surviving Spouse of Outright Bequests and Nonprobate Property to a QDOT

Introductory Material

A. Statutory Provisions

B. Effective Dates

C. Regulatory Provisions Governing Transfers of Property to a QDOT

1. General Rule

2. Application of Marital Deduction Requirements to Transferee Trust

D. Who May Make the Transfer

E. When Must the Transfer to the QDOT Be Made?

F. Irrevocable Assignment of Property to a QDOT

G. Special Rules for Transferable Annuities

H. Special Provisions Governing Assignments and Transfers

I. Protective Assignments of Property to a QDOT

1. The Problem

2. Protective Assignments Under the Regulations

J. Non-Transferable Property

K. Effect of Transfer or Assignment on Other Tax Provisions

1. Statutory Provision

2. Regulatory Provisions

a. Transfers by Disclaimer

b. Application of Chapter 14 Valuation Rules

3. Grantor Trust Status of QDOT Created by the Surviving Spouse

VI. Special Rules for Nonassignable Annuities and Other Arrangements

Introductory Material

A. Background

B. Final Regulations Governing "Nonassignable Annuities or Other Payments"

1. Overview

2. The Current Tax Method

3. The Rollover Method

4. Failure to Comply with Agreements

5. Foreign Plans or Arrangements

6. Determination of Corpus Portion of Annuity Payment

7. Hardship Exemption

8. Information Statement

VII. Taxation of QDOTs

Introductory Material

A. Taxable Events

1. General Rule

2. Are Distributions of Accumulated Income Taxable Events?

B. Amount Subject to Tax

1. Lifetime Distributions of Principal

2. Death of the Surviving Spouse

3. Trust Ceases to Qualify as QDOT

C. Amount of Tax

1. Rate of Tax

2. Change in Rate of Tax

3. Tentative Tax Imposed when Decedent Spouse's Federal Estate Tax Not Determined

4. Multiple QDOTs

a. General Rules

b. Designation of Return Filer

c. Allocation of QDOT Tax

D. Distributions Exempt from Tax

1. Distributions of Income

2. Treatment of Income in Respect of a Decedent

3. Principal Distributions on Account of Hardship

4. Additional Distributions and Transactions Not Giving Rise to QDOT Tax

E. Administrative Provisions

1. Liability for Tax

2. Imposition of Withholding Requirement on Payors of Certain Annuities

3. QDOT Return Filing Requirements - Form 706-QDT

a. Who Must File Form 706-QDT

b. Summary of Filing Instructions

4. Due Date for Payment of Federal Estate Tax

5. Extensions of Time to File Form 706-QDT and Pay the QDOT Tax

a. Filing Extensions

b. Tax Payment Extensions

6. Lien for QDOT Tax Due

7. Liability for QDOT Tax

8. Basis of Property Distributed from a QDOT

F. Cessation of Imposition of the QDOT Estate Tax: The Surviving Spouse Becomes a U.S. Citizen

1. Surviving Spouse Is a U.S. Resident

2. Surviving Spouse Is Not a United States Resident

a. QDOT Tax Had Not Been Imposed

b. QDOT Tax Had Been Imposed

VIII. Death of the Noncitizen Surviving Spouse

Introductory Material

A. Credit for Federal Estate Tax Paid

1. Calculating the § 2013 Credit

2. Application of § 2013 Under the Regulations

a. Property Subject to QDOT Election

b. Property Not Subject to QDOT Election

3. Efficiency of Credit

B. Allowance of Certain Tax Benefits

1. Disallowance Prior to OBRA 1989

2. Benefits Allowed

3. Presumption of Residency

4. Special Rule for Charitable Remainder Trusts Described in § 2056(b)(8)

5. Credit for State and Foreign Death Taxes

6. Alternate Valuation and Special Use Valuation

a. In General

b. Alternate Valuation

c. Special Use Valuation

7. Extension of Time to Pay QDOT Tax

C. Double Taxation

D. Use of Spouse's Unified Credit and Federal Estate Tax Brackets

E. Generation-Skipping Transfer Tax

1. Who Is the Transferor?

2. Availability of the "Reverse" QTIP Election

IX. Federal Gift Tax on Transfers to Noncitizen Spouses

Introductory Material

A. Limitation on the Marital Deduction for Gifts to Noncitizen Spouses

1. Extension of Gift Tax Marital Deduction to Nonresidents Alien Donors

2. Disallowance of Gift Tax Marital Deduction

3. Annual Exclusion

4. Joint and Survivor Annuities

B. Federal Gift Tax Effects of Creation and Termination of Joint Tenancies

1. Reenactment of Pre-ERTA Rules

2. Creation and Termination of Interests in Jointly Owned Property

a. Real Property

(1) Creation of a Joint Tenancy

(2) Termination of Spousal Joint Tenancy in Real Property

b. Personal Property-General Rule

3. Effect of Termination of Joint Tenancy in Personal Property

a. Special Rules for Certain Types of Personal Property

(1) Joint Bank Accounts

(2) Joint Brokerage Accounts

X. Effect of Changes in the Federal Gift and Estate Tax Marital Deduction on Existing U.S. Tax Treaties

Introductory Material

A. Existing U.S. Transfer Tax Treaties

B. OBRA 1989 Treaty Provisions

1. General Provisions

2. Effect of Marital Deduction Changes on Property Passing from Nonresident Aliens

3. Effect of Marital Deduction Changes on Property Passing from U.S. Persons

4. Application of Treaties and QDOT Requirements

a. Decedent Is a U.S. Citizen or Resident

b. Decedent Is a Foreign Domiciliary

c. Trends in Treaty-Based Marital Deduction

XI. Effective Date Provisions

Introductory Material

A. Effective Dates of Statutory Provisions

1. Transitional Rules

2. Irrevocable Trusts

B. Effective Date Provisions for Final Regulations

1. General Effective Date Provisions for QDOT Regulations

2. Effective Date Provisions Regarding Payment of the QDOT Tax

3. Effective Dates of Final Regulations Governing Security Requirements for Collection of the QDOT Tax

a. General Rule

b. Incompetency

c. Irrevocable Trusts

4. Effective Dates of Gift Tax Provisions

XII. Planning for the Marital Deduction for Noncitizen Spouses

Introductory Material

A. Lifetime Planning

1. Domicile Planning

2. Unified Credit Planning

a. General Planning Considerations

b. Planning for Larger Estates

c. Generation-Skipping Transfer Tax Considerations

d. Lifetime Gift-Splitting

e. Special Considerations Where First Spouse to Die Is U.S. Citizen or Resident

f. Selecting Assets for Interspousal Transfers

3. Use of the Annual Exclusion

4. Qualified Transfers

5. Jointly Owned Property

a. General Considerations in Making Gifts of Jointly Owned Property

b. Severance of Joint Tenancies in Making Gifts to the Noncitizen Spouse

(1) Tracing Considerations

(2) Filing Federal Gift Tax Returns

6. Applying for United States Citizenship

7. Retirement Plan Assets

8. Miscellaneous Planning Issues

a. Treaties

b. Life Insurance

c. Charitable Trust Planning

d. Advance Private Letter Ruling

B. Planning for a Noncitizen Surviving Spouse After the First Spouse's Death

1. Spouse Becomes U.S. Citizen

2. No QDOT Created by Decedent

3. Decedent Created QDOT

4. Assignments of Property to a QDOT

5. Appointment of Designated Return Filer

6. Disclaimers

7. Section 9100 Relief

a. Standards for Relief

b. Late QDOT Elections

c. Assignments of Property to a QDOT

d. Notification of U.S. Citizenship

e. Bond and Letter of Credit Requirements


Working Papers

Table of Worksheets

Worksheet 1 H.R. Rep. 100-795, 100th Cong. 2d Sess. 592-594 (1988) (Ways and Means Committee Report on TAMRA)

Worksheet 2 H.R. Rep. 101-386, 101st Cong. 1st Sess. 668-670 (1989) (Conference Report to Omnibus Budget Reconcilition Act of 1989)

Worksheet 3 H.R. Rep. 101-894, 101st Cong., 2d Sess. 28-30 (1990) (Ways and Means Committee Report on Technical and Miscellaneous Revenue Act of 1990)

Worksheet 4 Preamble to Proposed QDOT Regulations PS-102-88, 1993-1 C.B. 885

Worksheet 5 Preamble to Final QDOT Regulations, T.D. 8612, 1995-2 C.B. 192

Worksheet 6 Preamble to Proposed and Temporary Regulations for QDOT Security Arrangements, T.D. 8613, 1995-2 C.B. 216

Worksheet 7 Preamble to Final Regulations for QDOT Security Arrangements, T.D. 8686, 1996-2 C.B. 152

Worksheet 8 Form 706-QDT, U.S. Estate Tax Return for Qualified Domestic Trusts and Instructions

Worksheet 9 Rev. Proc. 96-54, 1996-2 C.B. 386

Worksheet 10 Bond in Favor of IRS to Secure Payment of 20.2056A - 2 (d)(1)(i)(B)(2)

Worksheet 11 Letter of Credit to Secure Payment of 2056 A Tax - Regs. 20.2056A – 2 (d)(1)(i)(C)(2)

Worksheet 12 Confirmation of Letter of Credit Issued by Foreign Bank to Secure Payment of § 2056A Tax - Regs. § 20.2056A-2(d)(1)(i)(C)(3)

Worksheet 13 Agreement To Pay § 2056A Tax With Respect to Nonassignable Annuity - Regs. § 20.2056A-4(c)(6)

Worksheet 14 Agreement To Roll Over Annuity Payments-for Nonassignable Annuity - Regs § 20.2056A (4)(7)

Worksheet 15 Sample QTIP Trust That Qualifies as a QDOT

Worksheet 16 Sample Provision for Appointment of QDOT Trustees

Worksheet 17 Sample Fiduciary Powers in Will Authorizing Trust Reformation, QDOT Election, and Appointment of Designated Return Filer

Worksheet 18 Sample Tax Clause Directing Payment of QDOT Tax





Treasury Regulations:

Related Statutes:

Legislative History:

Revenue Rulings: