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Sutherland Partner Doug Siegler is the author of Transfers to Noncitizen Spouses, which 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.
This Portfolio describes the policy reasons behind the 1988 legislation and includes copies of the legislative reports. 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 This deduction was withdrawn by the Technical and Miscellaneous Revenue Act of 1988 with respect to transfers to noncitizen spouses, generally effective for transfers made after November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. Transfers to Noncitizen Spouses also discusses the impact of the 2001 Tax Relief Act on transfers to noncitizen spouses.
This 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. Transfers to Noncitizen Spouses also addresses the special 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.