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Gift and estate taxation: noncitizen spouse issues.


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 marital deduction n. when one spouse dies, the survivor may take a tax deduction of half of the value of the estate of the dying spouse. Thus, the minimum value of the estate before there is a possible federal estate tax rises from $600,000 to $1,200,000 at the death  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 Resident Alien

A foreigner who is a permanent resident of the country he or she resides, but does not have citizenship.

Notes:
Resident and non-resident aliens have different filing advantages and disadvantages.
 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 The recipient of a gift. An individual to whom a power of appointment is conveyed.


donee n. a person or entity receiving an outright gift or donation.


DONEE.
 spouse is not a U.S. citizen. Sec. 2523 provides some relief, via a $100,000 annual exclusion Annual exclusion

A tax rule allowing the deduction of certain income from taxation.
 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 Unlimited marital deduction

An Internal Revenue Service provision that allows an individual to transfer an unlimited amount of assets to a spouse, during life or at death, without incurring federal estate or gift tax.
 in computing the taxable estate Taxable Estate

The total value of a deceased person's assets that are subject to taxation - minus liabilities and minus the prescribed tax-deductible portion of assets left behind by the deceased.
 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 QDT Data (File Name Extension)
QDT Qualified Domestic Trust (estate planning)
QDT Quantum-Defect Theory
QDT Quicken Data
QDT Quark Dictionary
QDT Quicken Dictionary
QDT Quiet Drive Technology
). Under Sec. 2056A(a), a QDT has the following characteristics:

* The trust instrument must require at least one trustee to be either an individual U.S. citizen or a domestic corporation.

* Any nonincome distributions from the trust must have the approval of this trustee, who has the right to withhold from the distribution the applicable estate tax computed under Sec. 2056A.

* The trust must comply with IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws.  regulations to ensure collection of the estate tax imposed on "taxable events."

* The executor executor n. the person appointed to administer the estate of a person who has died leaving a will which nominates that person. Unless there is a valid objection, the judge will appoint the person named in the will to be executor.  must make an irrevocable election on the decedent's estate tax return to have the trust treated as a QDT.

Proper formation of a QDT will qualify transfers to the trust for a marital deduction in the decedent's estate. As a consequence, Sec. 2056A(b)(1) imposes an estate tax on certain taxable events, including (1) distributions of principal to the surviving spouse; (2) the value of property remaining in the trust at the surviving spouse's death; and (3) the value of property remaining in the trust when the QDT fails to meet any of the Sec. 2056A(a) characteristics. Proper use of a QDT will yield an interest-free deferral of the decedent's estate tax until the occurrence of a taxable event.

Sec. 2056A(b)(12) provides an additional special rule when the noncitizen spouse becomes a U.S. citizen. In this case, a marital deduction will be allowed if the surviving spouse becomes a U.S. citizen before the estate tax return is filed, and was a U.S. resident at all times after the decedent's death and before becoming a U.S. citizen. Given that the process of becoming a U.S. citizen may not be completed by the estate tax return's extended due date, this should be considered an opportunity of last resort.

Planning considerations

Gift and estate tax planners need to be cognizant of situations involving (1) resident alien spouses, such as a Canadian citizen couple living in the U.S., or (2) a U.S. citizen married to a non-U.S. citizen, both of whom are living either in the U.S. or abroad. In these situations, the unlimited marital deduction for lifetime transfers is not available and use of the $100,000 annual exclusion should be considered. In addition, formation of a QDT should be contemplated for transfers to the non-U.S. citizen spouse from the estate. If the couple is residing in the U.S., another possibility would involve the non-U.S. citizen spouse becoming a U.S. citizen. As a resident alien, the noncitizen spouse is already subject to U.S. income, gift and estate tax. Becoming a U.S. citizen would allow the estate to take the unlimited marital deduction for property passing to the surviving spouse, and would allow the surviving spouse to make annual exclusion gifts or unified credit unified credit

A credit used against federal taxes due on estates and large gifts. Under current law, the unified credit is sufficient to offset taxes on values of approximately $1 million in estates and large gifts.
 gifts to others of property that would otherwise be trapped in the QDT.

Absent the spouse becoming a citizen, the donor spouse must be very careful as to gifts made during his lifetime. Present interest gifts to the noncitizen spouse in excess of $100,000 each year are taxable. This will make inter vivos [Latin, Between the living.] A phrase used to describe a gift that is made during the donor's lifetime.

In order for an inter vivos gift to be complete, there must be a clear manifestation of the giver's intent to release to the donee the object of the gift,
 funding of an irrevocable qualified terminable interest property trust Qualified Terminable Interest Property Trust (Q-TIP)

A trust that allows a surviving spouse to receive income generated from the trust, while the actual distribution of the trust's assets is made to other beneficiaries such as the grantor's children.
 difficult. It also may affect the availability of a spousal interest in a qualified personal residence trust The following article on personal residence trusts and qualified personal residence trusts is taken from attorney Jacob Stein's treatise on tax planning, with his permission. . If a grantor-retained annuity trust is used, and there is a spousal interest in the event the grantor An individual who conveys or transfers ownership of property.

In real property law, an individual who sells land is known as the grantor.


grantor n.
 dies during the trust term, this will presumably pre·sum·a·ble  
adj.
That can be presumed or taken for granted; reasonable as a supposition: presumable causes of the disaster.
 have to meet the QDT rules to accomplish the desired result. All of this requires great care in marital planning. Because many Americans are married to non-U.S. citizens, these considerations are very important.
COPYRIGHT 1995 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1995, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:Doiron, Daniel P.
Publication:The Tax Adviser
Date:Aug 1, 1995
Words:1021
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