When a spouse is a non-citizen it presents a problem in that there is no unlimited marital deduction if a spouse is not a U.S. citizen. The potential loss of the marital deduction could result in the surviving spouse suffering great loss of the estate.

While we often look to the QDoT (Qualified Domestic Trust) as the solution it can be a tax trap for the unwary. The estate tax is not pardoned it is merely postponed. Moreover, any distribution to the surviving non-citizen spouse- other than as income or amounts  paid out due to hardship results in immediate estate tax.

If a QDoT is used at the surviving spouse's death the entire value of the trust assets will be subject to federal estate tax. If a QDoT pays tax payable upon any of the triggering events (research), that tax payment itself is considered a distribution which in turn triggers further estate tax liability. The QDoT tax is at the highest marginal rate of the citizen spouse (assuming that spouse departed first). QDoT tax cannot be avoided by consumption of corpus (absent a hardship as defined in the code).

Potential Solutions:

The best solution is for the non-citizen spouse to become a U.S. citizen. But that may not always be possible or practical, in which case other alternatives should be considered.

Next use of the QDoT which isn't perfect but might provide some utility and post-death planning for the non-citizen spouse.

Next, annual exclusion gifts to the non-citizen spouse may be used to reduce the estate of the citizen spouse and provide the non-citizen spouse with the means to secure the unified credit in his or her own estate as well, thus sheltering more of the combined estate from estate tax. IRC Sec. 2523(i) which allows a $164,000 annual exclusion for gifts to non-citizen spouses, effective for gifts made on or after July 14, 1988. This generous allowance should be taken advantage of to reduce the estate of the citizen spouse.

In accord with the gifting opportunity; an affluent citizen spouse making such annual cash gifts to their non-citizen (up to $164,000),[1] the non-citizen spouse could use the money to purchase life insurance on the citizen spouse's life. At the departure of the citizen spouse, the surviving non-citizen spouse would receive the policy proceeds free of federal and state (if applies) death taxes. The proceeds might not be subject to claims of the deceased spouse's creditors (state by state application). The surviving non-citizen could “take the loot and scoot” or use the money to purchase assets from the deceased citizen spouse's estate and then go back to their original country (without IRS on the hunt). For even better protection a trust (ILIT = irrevocable life insurance trust) could purchase life insurance on the citizen spouse's life. At their departure, the insurance proceeds would provide cash to purchase assets from their estate but none of the proceeds would be in either spouse's estate. In a scenario such as this a second to die policy on both spouses is often used or two separate policies; one for each spouse providing income and liquidity upon the first spouse to pass.

[1] . Current for 2022