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QDOTs: Not coming soon to a theater near you!

If you are married and not a United States citizen or if you are married to a person who is not a United States citizen you need to plan your estate accordingly. Under the tax code married citizens are treated differently than married non-citizens. Under the rules for married citizens, if one spouse dies all of the assets pass tax free (via the unlimited marital deduction) to the surviving spouse, with estate tax due at the death of the surviving spouse. This is not the case for a married couple in which one spouse is not a United States citizen. Unless properly planned for, the unlimited marital deduction is lost between a citizen spouse and a non-citizen spouse.

There are very good reasons to treat non-citizens different than citizens in this situation. The primary concern of the government is that the surviving spouse, who is not a citizen, may move back to their country of origin after the death of their citizen-spouse, and take their assets with them. Once the assets are out of the country and belong to the citizen of another country, the odds of the IRS being able to collect the taxes due are greatly diminished. In short, the government wants their money and unless the non-citizen spouse plays by the government’s rules they will have to pay up at the first death.

The United States tax code makes certain allowances for married citizens. Assets that pass from a United States citizen to his or her United States citizen spouse generally qualify for the unlimited marital deduction, which allows for an unlimited amount of assets to pass from spouse to spouse without any tax liability. This is not the case when one of the spouses is not a United States citizen. Non-citizens have to take extra steps in order to qualify for the unlimited marital deduction.

In order to take advantage of the unlimited marital deduction the citizen spouse must pass assets to their non-citizen spouse via a Qualified Domestic Trust (QDOT). A QDOT has several requirements. Basically, there must be at least one Trustee who is a U.S. citizen. Furthermore, the tax code requires that the Trustee must have the right to withhold the tax due from any distribution to the non-citizen spouse. The tax code also requires the Executor of the decedent’s estate to elect for QDOT treatment.

A QDOT is the only way to preserve the unlimited marital deduction between a citizen and non-citizen spouse. Although they should ask, make sure your attorney is aware that you are not a citizen, as this will greatly affect your estate plan.