Non-Residents and Estate Tax
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A Resident Non-Citizen is generally taxed for estate tax purpose as a US Citizen, except for marital deduction issues.
Who is a Resident for Estate Tax Purposes? A U.S. estate tax purposes is not the same as the definition of “resident” for U.S. income tax purposes. For U.S. estate tax purposes, a resident decedent is someone who, at the time of death, was domiciled in the US. A person acquires a domicile by living at a location, for even a brief period, with no definite present intention of leaving. Residence without the requisite intention to remain indefinitely does not suffice to constitute domicile. An intention to change domicile is not effective unless accompanied by an actual removal from the jurisdiction. The IRS will examine the duration of the individual’s stay in the United States, the location of family and friends and important personal belongings, the center of the person’s financial and business interests, and the size and location of the person’s home.
Lifetime Gifts to a Non-Citizen Non-Resident or Resident Non-Citizen spouse are limited under Code section 2523(i). There is no unlimited marital deduction, but there is an expanded annual exclusion, currently $139,000 (2012). Therefore, if spouses have significantly different values in their estates, while it may be a good idea to try to equalize them in order to accomplish the Bypass Planning. The more property you can allocate to the estate of the Non-Resident Non-Citizen or Resident Non-Citizen spouse, the less property will be subjected to the estate tax marital deduction rules described below for gifts to a non-citizen spouse. Generally the marital deduction will only be available for transfers to a non-citizen spouse if the transfer is to a qualified domestic trust. However, if the spouse transfers property received from the decedent to such a trust before the due date for the Estate Tax return (706), or if the spouse becomes a US citizen before that time, then the marital deduction can be available in that circumstance as well.
Qualified Domestic Trust (“QDOT”). A qualified domestic trust (QDOT) is a trust that meets the following requirements:
(1) The trust instrument must require that at least one trustee (the “U.S. trustee”) of the trust be an individual citizen of the United States or a domestic corporation. For this purpose, a domestic corporation is defined as a corporation that is created or organized under the laws of the United States or under the laws of any state or the District of Columbia.
(2) The trust instrument must provide that no distribution (other than a distribution of income) may be made from the trust unless a trustee who is an individual citizen of the Unite States or a domestic corporation has the right to withhold from the distribution the estate tax imposed on the distribution.
(3) The trust must meet the requirements of regulations to ensure the collection of any estate tax imposed on the trust.
(4) The decedent’s executor must elect that the trust be treated as a QDOT.
Also, if the value of the trust as finally determined for estate tax purposes exceeds $2MM, the trust must also have certain security arrangements. Either the US trustee must be a bank, or the trustee provides a strictly defined surety bond or letter of credit. See Treas. Reg. 20.2056A-2(d)(1)(i). If there is more than one QDOT, they are aggregated for purposes of determining whether these security arrangements are required.
Consider Where Assets Should be Owned. Even though a QDOT will be available for the estate of the US resident decedent to claim a marital deduction for a non-citizen spouse, consider that the trust will have to have a US trustee and that bond may be due. If there are assets that the spouse will want to control himself or herself without the trustee, consider ways to get those into the spouse’s name during life so there is no issue with having to claim the marital deduction at death.
ABOUT THE AUTHOR: Thomas M. Dunlap, Partner at DunlapWeaver PLLC
Tom's practice focuses on government contracts, IP prosecution and disputes in business and commercial law with a particular focus in government contracts, and intellectual property matters (patent, copyright, trademark, trade secrets). Tom has authored numerous books, including Chapter 8 of the Virginia Lawyer’s Deskbook (Intellectual Property) (2013), IP Litigation for the Everyday Lawyer (2011), Speaking Objections (2009), and Government Contracts – Bid Protests (2012).
In addition to nine years as an Army officer (Cavalry), holding an instrument pilot’s license, an MBA and an MS in Biotechnology, Tom has served as a Special Prosecutor and has a background in banking and finance from time spent in commercial banking at JP Morgan Chase and the Bank of New York in the Private Client Group. Tom is presently an Airport commissioner for KJYO (Executive Airport) adjacent to Dulles).
Copyright DunlapWeaver, PLLC
More information about DunlapWeaver, PLLC
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
Lifetime Gifts to a Non-Citizen Non-Resident or Resident Non-Citizen spouse are limited under Code section 2523(i). There is no unlimited marital deduction, but there is an expanded annual exclusion, currently $139,000 (2012). Therefore, if spouses have significantly different values in their estates, while it may be a good idea to try to equalize them in order to accomplish the Bypass Planning. The more property you can allocate to the estate of the Non-Resident Non-Citizen or Resident Non-Citizen spouse, the less property will be subjected to the estate tax marital deduction rules described below for gifts to a non-citizen spouse. Generally the marital deduction will only be available for transfers to a non-citizen spouse if the transfer is to a qualified domestic trust. However, if the spouse transfers property received from the decedent to such a trust before the due date for the Estate Tax return (706), or if the spouse becomes a US citizen before that time, then the marital deduction can be available in that circumstance as well.
Qualified Domestic Trust (“QDOT”). A qualified domestic trust (QDOT) is a trust that meets the following requirements:
(1) The trust instrument must require that at least one trustee (the “U.S. trustee”) of the trust be an individual citizen of the United States or a domestic corporation. For this purpose, a domestic corporation is defined as a corporation that is created or organized under the laws of the United States or under the laws of any state or the District of Columbia.
(2) The trust instrument must provide that no distribution (other than a distribution of income) may be made from the trust unless a trustee who is an individual citizen of the Unite States or a domestic corporation has the right to withhold from the distribution the estate tax imposed on the distribution.
(3) The trust must meet the requirements of regulations to ensure the collection of any estate tax imposed on the trust.
(4) The decedent’s executor must elect that the trust be treated as a QDOT.
Also, if the value of the trust as finally determined for estate tax purposes exceeds $2MM, the trust must also have certain security arrangements. Either the US trustee must be a bank, or the trustee provides a strictly defined surety bond or letter of credit. See Treas. Reg. 20.2056A-2(d)(1)(i). If there is more than one QDOT, they are aggregated for purposes of determining whether these security arrangements are required.
Consider Where Assets Should be Owned. Even though a QDOT will be available for the estate of the US resident decedent to claim a marital deduction for a non-citizen spouse, consider that the trust will have to have a US trustee and that bond may be due. If there are assets that the spouse will want to control himself or herself without the trustee, consider ways to get those into the spouse’s name during life so there is no issue with having to claim the marital deduction at death.
ABOUT THE AUTHOR: Thomas M. Dunlap, Partner at DunlapWeaver PLLC
Tom's practice focuses on government contracts, IP prosecution and disputes in business and commercial law with a particular focus in government contracts, and intellectual property matters (patent, copyright, trademark, trade secrets). Tom has authored numerous books, including Chapter 8 of the Virginia Lawyer’s Deskbook (Intellectual Property) (2013), IP Litigation for the Everyday Lawyer (2011), Speaking Objections (2009), and Government Contracts – Bid Protests (2012).
In addition to nine years as an Army officer (Cavalry), holding an instrument pilot’s license, an MBA and an MS in Biotechnology, Tom has served as a Special Prosecutor and has a background in banking and finance from time spent in commercial banking at JP Morgan Chase and the Bank of New York in the Private Client Group. Tom is presently an Airport commissioner for KJYO (Executive Airport) adjacent to Dulles).
Copyright DunlapWeaver, PLLC
More information about DunlapWeaver, PLLC
View all articles published by DunlapWeaver, PLLC
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
