The estate and gift tax marital deduction is not allowed for transfers to a surviving spouse unless the surviving spouse is a U.S.citizen.   The concern is that the noncitizen spouse may leave the country and avoid federal estate tax.

If the surviving spouse was a U.S. resident at all times following the decedent’s death and becomes a U.S. citizen prior to filing the decedent’s 706, the estate tax marital deduction is permitted.

Qualified Domestic Trust

The second exception under which a noncitizen spouse can qualify for the marital deduction is through use of a qualified domestic trust (QDT).   The property must be transferred to the QDT before the decedent’s tax return is filed or is irrevocably assigned to a QDT before the return is filed.  If the surviving spouse receives property as a surviving joint tenant, beneficiary of life insurance or employee benefit plan, or by bequest, it may be transferred to a QDT.  Transfer to a QDT may subject the remainder interest to the gift tax unless the surviving spouse retains a power sufficient to make the transfer incomplete.  If a trust is reformed and the action is filed prior to the date the decedent’s 706 is filed, changes made to the trust in the reformation action will be taken into account.  Trust reformation is recognized only if the marital deduction would have been allowable but for the fact that the surviving spouse was a noncitizen.

A QDT must require the following:

  • One trustee must be an individual citizen of the United States or a domestic corporation.
  • No distribution (other than income) may be made unless the trustee who is a citizen of the United States or a domestic corporation has a right to withhold from the distribution the tax on distributions imposed by Section 2056A.
  • The trust must meet such requirements as the Secretary may prescribe by regulation to assure collection of any tax imposed by Section 2056A(b).
  • The decedent’s executor must make an irrevocable election on the decedent’s estate tax return to treat the trust as a QDT.

If the fair market value of the assets passing to the QDT exceed of $2 million, either (A) at least one Trustee must be a United States bank described in Section 581, or a U.S. Branch of a foreign bank; (B) the Trustee must furnish a bond in favor of the Internal Revenue Service in an amount equal to 65% of the fair market value of the trust corpus; or (C) the Trustee must furnish an irrevocable letter of credit in an amount equal to 65% of the fair market value of the trust corpus.

If the fair market value of the QDT assets is $2 million or less, the QDT must provide that the trustee will either satisfy the requirements listed above, or limit the fair market value of real property that is held by the trust and situated outside the United States to 35% of the value of the trust at the close of the taxable year.  A special look-through rule applies for interests in corporations or partnerships that own real property.  In addition, an executor may elect to exclude up to $600,000 in value of a principal residence passing to the QDT and determining whether the $2 million threshold has been exceeded.

Creating and Terminating Joint Tenancies in Real Estate

Several issues arise when a non-citizen spouse owns real estate jointly with a citizen spouse.  The rules governing the creation and termination of joint tenancies in real estate where one or both spouses are non-citizens are complex.  This section deals with tenancies established after July 13, 1988.  Different rules apply for different time periods before that date.

The Portion of the Jointly-Owned Real Estate Is Includable in the Estate of the First Spouse to Die

Since 1988 the I.R.S. has followed a contribution rule.  Under the contribution rule, upon the death of joint property owner, his or her estate will include that portion of the property attributable to the portion of the original purchase price and cost of capital additions supplied by the decedent over the total cost of acquisition and capital additions. The burden of proof with respect to contribution is on the executor to show that the surviving joint tenant furnish some portion of the consideration or that the property was acquired by the decedent and the other joint owner by gift, bequest, devise or inheritance. In community property states, each spouse is considered to have supplied half of the consideration.  The community property rules supersede the contribution rule.

Real Estate with a Situs Outside the United States

If the decedent is a non-U.S. domiciliary, his or her U.S. taxable estate does not include property with a situs outside the U.S.

If the decedent’s spouse is a U.S. citizen or domiciliary, his gross estate includes the value of all property owned at death regardless of situs. The contribution rule would apply for all real estate, including that with a situs outside the U.S., if the surviving spouse of a U.S. domiciliary is a non-citizen.  However, if the surviving spouse is a U.S. citizen, the spousal joint tenancy rule would apply.

Creation of Joint Tenancy or Tenancy by the Entirety

The creation of a joint tenancy or tenancy by the entirety in real estate, as well as any additions to the value of the tenancy in the form of improvements, reductions of indebtedness, or otherwise, is not deemed to be a transfer of property for gift tax purposes, regardless of the proportion of the consideration furnished by each spouse, provided the creation of the tenancy would otherwise be a gift to a non-citizen donee spouse.  If the donee spouse is a U.S. citizen, establishment of the joint tenancy is treated as a gift within the unlimited marital deduction.

Termination of Joint Tenancy or Tenancy by the Entirety

If a joint tenancy or tenancy by the entirety is later terminated other than by the death of one spouse, the spouse is deemed to have made a gift to the extent that the proportion of the total consideration furnished by the spouse, multiplied by the proceeds of the termination, exceeds the value of the proceeds of termination received by the spouse. In other words, there is a gift to the extent that one spouse receives less than his or her proportionate share of the proceeds based on the percentage of consideration each spouse contributed toward the original purchase price, plus improvements or reductions of indebtedness.  Therefore, to the extent that upon termination the donee spouse simply receives back his or her proportionate share, there is no gift.  If the non-citizen spouse receives more than his or her proportionate share, then there is a gift.

If the joint tenancy or tenancy by the entirety is terminated by death, the contribution rule will apply if the surviving spouse is a non-citizen.  The contribution rule does not apply if the surviving spouse is a citizen.

Written By Thomas D. Begley, Jr. for Beyond Counsel an Estate Planning Software Company

©2018 Beyond Counsel, LLC. All rights reserved.

            I.R.C. §2056(d).

            I.R.C. §2056(d)(4).

            I.R.C. §2056(d)(2)(A).

            I.R.C. §2056(d)(2)(B).

            Ltr. Ruls 8952005, 9044072.

            Treas. Reg. §25.2511-2.

            I.R.C. §2056(d)(5)(A).

            Ltr. Rul. 9043070.

            I.R.C. §2056A.

            I.R.C. §2056A(a).



            I.R.C. §2056A(d).

            Treas. Reg. §20.2056A-2(d)(1)(I).

            Treas. Reg. §20.2056A-2(d)(1)(ii).

            I.R.C. §§ 2040(a), 2040(b) and Treas. Reg. 20.2040-1(a)(2).

            Treas. Reg. 20.2056A-8(a)(1) and 20.2040-1(a)(2).

            I.R.C. § 2103.

            I.R.C. § 2101.

            Treas. Reg. 20.2056A-8(a)(1).

            Treas. Reg. 25.2523(I).2(b)(2)(I).

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