Download Estate Planning Considerations for the Non

An Independent Delaware Trust Company
Estate Planning Considerations for the NonCitizen Spouse
Ted M. Greenberg, Esquire
When you are planning your estate and your spouse is not a US
citizen, there is something very important to consider.
Property that passes from the decedent spouse to the surviving
spouse by reason of the decedent spouse’s death passes free of
federal estate tax. This is due to the marital deduction. The amount
of the marital deduction is unlimited and therefore not subject to any
ceiling. It has the effect of postponing the federal estate taxation of
property that passes from the decedent spouse to the surviving
spouse until the surviving spouse’s death to the extent that the
property is not expended by the surviving spouse during his or her
lifetime. However, this estate tax deferral opportunity is somewhat
limited when the surviving spouse is not a US citizen.
The marital deduction applies when the surviving spouse is a US
citizen and property passes outright to him or her (or in certain trusts
for the benefit of the surviving spouse discussed below).
Conversely, the marital deduction does not apply when the surviving
spouse is not a US citizen and property passes outright to him or her.
It applies only when the property passing to the surviving spouse
passes in a qualified domestic trust, or “QDOT”. Therefore, a
QDOT can become a powerful estate planning tool.
In addition to complying with a unique set of rules and regulations
(some of which are discussed below), a QDOT must be a marital
trust that would otherwise qualify for the federal estate tax marital
deduction if the surviving spouse were a US citizen. The most
common trusts for this purpose are a general power of appointment
marital trust, or “GPOA Trust”, and a qualified terminable interest
Ted M. Greenberg is Trust Counsel for CTC.
His responsibilities include overseeing the
administration of various types of trusts to
ensure that CTC’s fiduciary duties are being
properly discharged, finding solutions to
complex trust administration issues, advising
CTC staff on legal matters, and reviewing trusts
to determine whether they meet CTC’s criteria
for acceptance when CTC is being considered
to serve as Trustee. Prior to joining CTC, Ted
was in private practice in Philadelphia,
Pennsylvania, concentrating on estate planning,
estate and trust administration, asset and wealth
preservation, federal, state and local taxation,
business succession strategies, ERISA, and
employee benefit and retirement planning for
both qualified and non-qualified plans.
CONTACT US
Commonwealth Trust Company
29 Bancroft Mills Road
Wilmington, DE 19806
P: 302.658.7214 | F: 302.658.7219
[email protected]
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May 4, 2016
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property marital trust, or “QTIP Trust”. In both of these trusts, the remaining trust assets are included in the
surviving spouse’s estate upon his or her death, thereby postponing the federal estate taxation until the death of
the surviving spouse.
A GPOA Trust is created for the sole benefit of the surviving spouse during his or her lifetime. Its terms provide
the surviving spouse with an income interest for life. The surviving spouse is granted a broad power to direct the
distribution of assets remaining in the trust at his or her death; this power is known as a general power of
appointment.
Like a GPOA Trust, a QTIP Trust provides the surviving spouse with an income interest for life. However, the
surviving spouse will not have the power to direct the distribution of the remaining trust assets at his or her
death. Instead, the remaining trust assets will be distributed in accordance with, and to the beneficiaries named,
in the trust instrument. In other words, the decedent spouse, as the trust creator, controls the disposition of the
remaining trust assets at the death of the surviving spouse.
A GPOA Trust or QTIP Trust for the benefit of a surviving non-citizen spouse will not qualify for the marital
deduction unless it also meets certain requirements that qualify it as a QDOT. These requirements help ensure
that the US will be able to collect QDOT estate taxes during the surviving spouse’s lifetime if principal
distributions are made to the surviving spouse and upon the surviving spouse’s death or disqualification of the
trust as a QDOT.
A fundamental QDOT requirement is that at least one trustee be a US trustee. A US trustee is an individual who
is a US citizen or a domestic corporation. A domestic corporation is a corporation organized under the law of
any state or the District of Columbia. Therefore, the surviving non-citizen spouse may be a trustee as long as a
US trustee is serving with him or her.
If the value of the QDOT assets exceeds $2 million (not including a personal residence with a value of up to
$600,000), a QDOT trustee must be a US bank unless the US trustee meets certain bond (i.e., a bond in favor of
the IRS in an amount equal to at least 65% of the fair market value of QDOT assets without regard to any
indebtedness on such assets) or letter of credit requirements.
Generally, a QDOT estate tax is imposed in three circumstances: during the lifetime of the surviving spouse if
and when principal is distributed to him or her; upon the death of the surviving spouse on the then remaining
trust assets; and upon disqualification of the trust as a QDOT. In fact, if the QDOT is to distribute principal
during the surviving spouse’s lifetime, the QDOT must give the US trustee the right to withhold from the
distribution the QDOT estate tax imposed on the distribution.
In the case of a distribution of QDOT principal to the surviving spouse during his or her lifetime, the QDOT
estate tax is based on the fair market value of the principal distributed and the amount that the US trustee
withholds from the distribution to pay the QDOT estate tax. However, the QDOT estate tax does not apply to
income distributed to the surviving spouse or to hardship distributions of principal. A hardship distribution of
principal is a distribution made for an immediate and substantial financial need relating to the health, education,
maintenance and support of the surviving spouse or of any person the surviving spouse is legally obligated to
support.
A QDOT estate tax is imposed on the fair market value of the remaining QDOT assets at the surviving spouse’s
death or at the time of the disqualification.
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The QDOT estate tax equals the Federal estate tax that would have been imposed on the decedent spouse’s estate if
the decedent spouse’s estate were increased by the value of property distributed in the case of a lifetime distribution
of principal, or the value of the property remaining in the QDOT at the time of the surviving spouse’s death or the
disqualification, as the case may be, increased by the aggregate value of all property distributed in all prior
distributions, and decreased by the Federal estate tax which would have been imposed on the decedent spouse’s
estate had it been increased by the aggregate value of all property distributed in all prior distributions.
Planning for a non-citizen spouse is complicated, and the rules and regulations governing QDOTs are complex. It is
strongly recommended that you consult with your attorney and tax advisor when you are planning for a non-citizen
spouse. Nevertheless, if you are considering a QDOT as part of your estate plan, Commonwealth Trust Company, a
Delaware Trust Company, can serve as the US trustee. Furthermore, if the value of the QDOT exceeds $2 million,
the bond or letter of credit requirement can be avoided if Commonwealth Trust Company is appointed as Trustee
because Commonwealth Trust Company qualifies as a US bank for purposes of the QDOT rules. Moreover, the
QDOT can be a Delaware Directed Trust under Delaware law and thereby give the non-citizen spouse, or another
person, a meaningful role in the trust investment decision-making process.
Commonwealth Trust Company is pleased to provide this article as a guide. Commonwealth Trust Company
is not engaged in the practice of law and is not providing legal advice by the provision of these materials.
Commonwealth Trust Company recommends that clients seek the opinion of their attorney regarding the
specific legal and tax issues addressed in this article.
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May 4, 2016
Copyright 2016, Commonwealth Trust Company. All rights reserved. These materials may not be reproduced without permission of the copyright holder.