2024 Estate Planning Outlook: Transfer Tax Changes are on the Horizon

The Tax Cuts and Jobs Act of 2017 (TCJA) significantly increased the lifetime estate and gift tax exemption from $5.6 million to $11.18 million for individuals, with adjustments for inflation starting in 2018. For 2023, the lifetime estate and gift tax exemption is $12.92 million (or $25.84 million for married couples). For 2024, the lifetime estate and gift tax exemption will be $13.61 million (or $27.22 million for married couples). This relatively high exemption level has offered substantial relief to many taxpayers in recent years.

However, absent Congressional action, the lifetime estate and gift tax exemption is scheduled to sunset after 2025 to its pre-2018 amount (adjusted for inflation). If this sunset does in fact occur, we anticipate that the lifetime estate and gift tax exemption will revert to around $7 million ($14 million for couples) for 2026, effectively reducing the exemption by about one-half. This substantial reduction in the lifetime estate and gift tax exemption will cause many more people to be potentially subject to federal estate tax at death.

The potential substantial reduction in the lifetime estate and gift tax exemption could have several significant impacts on estate planning:

  1. Increased Number of Estates Subject to Estate Tax. A much higher number of individuals could be subject to estate tax at death due to the new lower estate tax exemption threshold. Proper planning is crucial to minimize this impact.
  2. Increased Estate Tax Liability. Individuals with estates valued in excess of the new lower estate tax exemption threshold could be subject to higher estate taxes at death. Proper planning is crucial to minimize this impact.
  3. Gifting Strategies. If the lifetime gift tax exemption is reduced, then individuals will have a diminished ability to make significant gifts during their lifetime and greater care will need to be given to maximizing the tax benefits of the lower exemption.
  4. Reviewing Existing Plans. Individuals who designed their estate plans based on the current lifetime estate and gift tax exemption should consider revisiting their plans to ensure those plans remain aligned with their goals and objectives.

The big question in the estate planning world today is whether, when, and to what extent Congress will enact changes to gift, estate, and income tax laws. With many challenges facing the current Biden Administration and a heavily divided Congress, it is not certain that major tax legislation even will be considered in 2024. Nevertheless, the tax proposals endorsed by the Biden Administration provide signals for actions clients should consider during the current year.

Executive Summary

  • The time to gift is 2024 — change is potentially on the horizon.
  • The timing and extent of potential changes to gift and estate tax laws are unclear.
  • Some potential changes could include reducing the exemption, increasing the estate tax rate, increasing the capital gains tax rate, and eliminating the basis adjustment.
  • Consider “locking in” the 2024 exemption amount by gifting to irrevocable trusts and continuing to take advantage of planning opportunities to shift appreciation out of your estate with techniques such as GRATs and intra-family loans.

Potential Legislative Tax Changes[1]

Potential Transfer Tax Changes – Lowered Transfer Tax Exemptions & Increased Transfer Tax Rate

The Biden Administration has proposed lowering the current lifetime estate and gift tax exemption amount to around $3.5 million per individual and increasing the estate tax rate from 40% to 45% on amounts exceeding the exemption. Instead, we may see Congress simply let the exemption sunset back to around $7 million (adjusted for inflation), which was the exemption amount before the substantial increase enacted under the TCJA.

For what it’s worth, the exemption has never been lowered. Despite this, the doubling of the exemption under the TCJA was a dramatic departure from past policies. Thus, reducing the exemption to $7 million (adjusted for inflation) may seem like an easier path, particularly since Congress is so heavily divided. In other words, Congress may opt to treat the last seven years as a fluke and return to “normal.”

Potential Income Tax Changes – Repeal Basis Adjustment & Capital Gains Taxed as Ordinary Income

The Biden Administration also signaled that it might seek repeal of the basis step-up at death and tax capital gains as ordinary income. Although the basis step-up is an income tax planning concept, it is also an important consideration in transfer tax planning. Under current law, gifts of low basis assets can be detrimental because the donee receives the donor’s basis. Taxpayers often decide to retain certain low basis assets, rather than sell them or gift them, to obtain the basis step-up at death. The family members or trusts receiving those assets then can sell those assets with little or no capital gains tax.

The Biden Administration has proposed to eliminate this basis adjustment. An alternative proposal involves treating the transfer of appreciated property at death or by gift as a taxable event causing the gain to be recognized, but many commentators think this is unlikely.

The Biden Administration proposal to tax long-term capital gains and qualified dividends as ordinary income on all income over $1 million would further exacerbate the impact of a repeal of the basis step-up.

Planning Ahead

2024 is an opportune time to make the most of your estate and gift tax exemption.

“Locking In” the Estate and Gift Tax Exemption

Many ultra-high net worth individuals have used most, if not all, of their exemption. Under current tax laws, in 2024, individuals may gift up to $13.61 million during their lives ($27.22 million for married couples). If the exemption decreases from $13.61 million to $3.5 million and the estate tax rate is raised from 40% to 45% percent, the cost of inaction is more than $4.5 million (if an individual makes a gift of $13.61 million while the exemption is $3.5 million and gifts beyond the exemption are taxed at a rate of 45%, the resulting gift tax amounts to roughly $4.5 million; $9 million for married couples). If individuals and married couples have not used their exemption(s) and can afford to, they should give serious consideration to completing gifts equal to their remaining exemption(s) in 2024, ideally to a generation-skipping trust for the benefit of their descendants, particularly since these exemptions are scheduled to sunset in 2025.

Depending on your and your family’s goals, circumstances, remaining exemption, and cash flow needs, gifting up to $27.22 million, or even $13.61 million, to a trust for your beneficiaries may not be feasible. A long-accepted way to address this concern is to create a trust that benefits both the Grantor’s spouse and descendants. This type of trust is commonly referred to as a Spousal Lifetime Access Trust (SLAT). A SLAT is a simple and effective way to address the possible need of the senior generation to access the property transferred. It provides direct access for the beneficiary spouse and indirect access for a Grantor spouse. Grantor Trust provisions, such as ones allowing the Grantor of the trust to swap assets or take loans from the trust without full and adequate consideration, offer tax flexibility, and access to funds by loan.

SLATs have become so popular that couples have created trusts for each other. This is not without risk and should only be done with different trust provisions and with creation of the trusts separated in time. Finally, it is important to remember that potential estate tax savings should never be the sole determinate of your financial planning decisions. Individuals who have stretched themselves thin to make significant gifts sometimes have profound “gifter’s remorse.” Thus, make gifts if you can, but, more importantly, make them if you’re comfortable doing so.

Freezing the Size of the Estate

Perhaps you and your spouse have already utilized your exemptions and are seeking ways to further reduce the tax burden on your estate, or you are not ready to commit large transfers of your property. In either situation, an excellent alternative is to freeze the growth of your estate with strategies like Grantor Retained Annuity Trusts (GRATs) and installment sales with trusts or family loans. GRATs and installment sales have thrived in the past low interest rate environment because assets have often grown in value at a rate above the rate of the annuity, in the case of GRATs, or the interest rate on a promissory note. However, in today’s current higher rate environment, the tax benefits of these planning opportunities may be more restrictive as the appreciation hurdle for a GRAT is now substantially higher than before, and the interest rate on an installment sale is also substantially higher. However, these strategies will still essentially “freeze” the size of one’s estate and transfer potentially significant appreciation, which would have otherwise remained in the client’s estate, out of his or her estate.

Uncertainty Doesn’t Preclude Planning

It is absolutely within the power of Congress to enact retroactive tax legislation if it is rationally related to a legislative purpose, but on a practical level, Congress usually avoids that option. It is almost always unpopular and adds only nominal additional revenue for budgeting purposes. Biden Administration officials already have stated they are not interested in seeking retroactive tax changes. Given the low probability, the threat of retroactive tax law changes should not prevent clients from implementing new estate planning strategies. For those who remain worried, a number of strategies can be structured in a manner that limits potential gift tax liability in the unlikely event legislative changes are enacted retroactively. In 2024, clients should consider reviewing their existing plan to determine whether they can employ certain strategies to maximize use of their exemption and achieve their planning objectives. If the lifetime estate and gift tax exemption is reduced, clients will lose the ability to give away that excess amount (and all subsequent appreciation on that amount).


[1] The following list of potential legislative changes is not all-inclusive. Instead, it focuses on the transfer tax and income tax proposals that would have the most significant impact on the practice of wealth transfer.

Estate Tax Planning for Non-United States Citizen Spouses: QDOT-ting I’s and Crossing T’s

estate tax planning non us citizensIndividual and corporate citizens from countries around the world have moved to North Carolina and contributed materially to our state’s economic, educational, and cultural growth. Foreign direct investment (“FDI”) in North Carolina generally surpasses $1 billion annually, which boosts our state’s private sector employment by hundreds of thousands of workers. In recent years companies based in Canada, Denmark, Germany, India, Japan, Switzerland, and the United Kingdom, among others, have invested in a range of industry projects “from Manteo to Murphy.”

Accompanying this foreign investment are individuals who are not United States (“U.S.”) citizens who establish residence here and who are known as “resident aliens” under U.S. tax law. In addition, nonresident, non-U.S. citizens (“nonresident aliens”) sometimes invest in real and personal property situated in our state—everything from vacation homes to ownership interests in North Carolina holding or operating companies. This increased foreign business and personal investment requires heightened attention to the complex Internal Revenue Code (“Code”) requirements applicable to non-U.S. citizens for income and transfer tax purposes.

The corporate and individual income tax issues surrounding such entities and persons have garnered much attention. For example, compliance with the sweeping changes under the Foreign Account Tax Compliance Act (FATCA) continues to affect U.S. citizen and resident alien taxpayers with foreign accounts and other foreign assets. Equally important are the tax issues that impact non-U.S. citizens in connection with transfers of money or property during lifetime or at death. This article is an overview of recurring basic considerations in estate and gift tax planning for non-U.S. citizen spouses. It is not intended to be an exhaustive treatment of this complex area of law, nor is it intended to address income tax planning for non-U.S. citizen spouses.

In general, the U.S. imposes estate and gift tax on the worldwide assets of U.S. citizens and resident aliens. A critical step in the estate planning process is the determination of the citizenship of a client and, if the client is married, that of the client’s spouse. The estate and gift tax implications largely depend on the type of tax, domicile tests, marital status, property ownership and situs tests, and treaty provisions.

With respect to the U.S. estate and gift tax rules, “residence” and “domicile” are threshold considerations that only a qualified tax professional should evaluate. The tests to determine “residence” in the U.S. income tax context are largely objective (e.g., the “substantial presence test”), but determining “residence” for transfer tax purposes is more subjective. For U.S. gift tax purposes, an individual donor is a U.S. resident if the donor is “domiciled” in the U.S. at the time of the gift. For U.S. estate tax purposes, a deceased person is a U.S. resident decedent if the person was “domiciled” in the U.S. at death. U.S. Treasury Regulations define “domicile” as living in a country without a definite present intention of leaving. The determination requires a facts-and-circumstances analysis of one’s “intent to leave” as demonstrated, for example, in visa status, tax returns, length of U.S. residence, social and religious affiliations, voter registration, and driver’s license issuance. Holding a “green card,” (i.e., status as a “lawful permanent U.S. resident” authorized to live and work here), though compelling, is not determinative evidence of U.S. domicile.

Tax treaties between the U.S. and other countries sometimes modify the Code provisions governing the transfer taxation of non-U.S. citizens. The treaties often explain concepts such as domicile, set forth which country taxes certain types of property, and relieve individuals from double taxation. The U.S. has entered into tax treaties with over 70 other countries. However, not all the treaties address estate and gift tax issues, including, significantly, the recent Code provisions regarding portability of a deceased spouse’s unused exclusion (“DSUE”). A recent check of the Internal Revenue Service (“IRS”) website reveals that treaties with at least 19 countries either contain estate and gift tax provisions or are freestanding estate and/or gift tax treaties.

To understand the general estate and gift tax rules applicable to non-U.S. citizen spouses, it is helpful first to review those applicable to U.S. citizen spouses.

The following examples illustrate the general rules relating to lifetime gifts:

EX. 1: LIFETIME GIFT FROM U.S. CITIZEN TO U.S. CITIZEN SPOUSE

Al, a U.S. citizen and resident, is married to Bea, also a U.S. citizen and resident. In 2017, Al Gives Bea $200,000, payable by check.

For U.S. gift tax purposes, Al’s gift to Bea does not trigger U.S. gift tax because Bea is a U.S. citizen spouse. The gift qualifies for the unlimited U.S. gift tax marital deduction applicable to gifts from one spouse to a U.S. citizen spouse.

The result would be the same if Al were a resident alien married to Bea, so long as she is a U.S. citizen. A gift from a resident alien to U.S. citizen spouse also qualifies for the unlimited U.S. gift tax marital deduction.

EX. 2: LIFETIME GIFT FROM U.S. CITIZEN TO NON-SPOUSE U.S. CITIZEN

Al, a U.S. citizen and resident, has an adult daughter, Claire, also a U.S. citizen and resident. In 2017, Al gives Claire $200,000, payable by check.

For U.S. gift tax purposes, $14,000 of the $200,000 qualifies for the U.S. present interest gift tax annual exclusion, while the remaining $186,000 must be reported on a U.S. gift tax return in 2018. Assuming no prior taxable gifts and a U.S. estate tax exemption of $5,490,000 (2017), the $186,000 reduces the U.S. estate tax exemption available at Al’s death from $5,490,000 to $5,304,000.

The tax treatment changes if one spouse is not a U.S. citizen.

EX. 3: LIFETIME GIFT FROM U.S. CITIZEN (OR RESIDENT ALIEN) TO RESIDENT ALIEN SPOUSE

Al, a U.S. citizen, is married to Dot, a citizen of Country X. They live in the U.S. Dot holds a “green card” and does not intend to leave the U.S. In 2017, Al gives Dot $200,000, payable by check.

Dot is a resident alien, so Al’s gift to her does not qualify for the unlimited U.S. gift tax marital deduction. For U.S. gift tax purposes, Al’s gift to Dot is subject to the special present interest U.S. gift tax annual exclusion for lifetime transfers to non-U.S. citizen spouses. In 2017, this special annual exclusion is ,000.

Accordingly, $149,000 of the $200,000 gift qualifies for the special U.S. present interest gift tax annual exclusion, while Al must report as a taxable gift the remaining $51,000 on a U.S. gift tax return in 2018. Assuming no prior taxable gifts, the ,000 reduces the U.S. estate tax exemption available at Al’s death from $5,490,000 to $5,439,000.

The result would be the same if both Al and Dot were married resident aliens.

The result also would be the same if Al were a nonresident U.S. citizen and Dot were a nonresident alien.

EX. 4: LIFETIME GIFT FROM U.S. CITIZEN (OR RESIDENT ALIEN) TO NON-SPOUSE RESIDENT ALIEN

Al, a U.S. citizen, has a cousin, Eva, a citizen of Country X. Both are U.S. residents. Eva holds a “green card” and does not intend to leave the U.S. In 2017, Al gives Eva $200,000, payable by check.

For U.S. gift tax purposes, Al’s gift to Eva, a non-spouse resident alien, is treated the same as if Eva were a non-spouse U.S. citizen. Thus $14,000 of the $200,000 gift qualifies for the present interest U.S. gift tax annual exclusion, while the remaining $186,000 must be reported as a taxable gift on a U.S. gift tax return in 2018. Assuming no prior taxable gifts, the $186,000 reduces the U.S. estate tax exemption available at Al’s death from $5,490,000 to $5,304,000.

EX. 5: LIFETIME GIFT OF U.S.-SITUS PROPERTY FROM U.S. CITIZEN TO NONRESIDENT ALIEN SPOUSE

Al, a U.S. citizen and resident, is married to Fay, a citizen of Country X. Both are residents of Country X but own personal and real property located in the U.S. In 2017, Al gives Fay $200,000 (payable by check drawn on a U.S. bank).

Al’s gift to Fay, a nonresident alien spouse, does not qualify for the unlimited U.S. gift tax marital deduction. For U.S. gift tax purposes, Al’s gift to Fay is subject to the special U.S. present interest gift tax annual exclusion for lifetime transfers to non-U.S. citizen spouses. In 2017, this special annual exclusion is $149,000.

Accordingly, $149,000 of the $200,000 gift qualifies for the special U.S. present interest gift tax annual exclusion, while Al must report as a taxable gift the remaining $51,000 on a U.S. gift tax return in 2018. Assuming no prior taxable gifts, the $51,000 reduces the U.S. estate tax exemption available at Al’s death from $5,490,000 to $5,439,000.

EX. 6: LIFETIME GIFT OF U.S.-SITUS PROPERTY FROM U.S. CITIZEN TO NONRESIDENT ALIEN NON-SPOUSE

Al, a U.S. citizen and resident, has a cousin, Grace, a citizen and resident of Country X. In 2017, Al gives Grace $200,000 (payable by check drawn on a U.S. bank).

For U.S. gift tax purposes, Al’s gift to Grace, a non-spouse nonresident alien, is treated the same as if Grace were a U.S. citizen. Thus $14,000 of the $200,000 gift qualifies for the present interest U.S. gift tax annual exclusion, while the remaining $186,000 must be reported as a taxable gift on a U.S. gift tax return in 2018. Assuming no prior taxable gifts, the $186,000 reduces the U.S. estate tax exemption available at Al’s death from $5,490,000 to $5,304,000.

EX. 7: LIFETIME GIFT OF U.S.-SITUS PROPERTY FROM NONRESIDENT ALIEN TO U.S. CITIZEN SPOUSE

Hope, a citizen and resident of Country X, is married to Al, a U.S. citizen. They live in Country X. In 2017, Hope gives Al real property located in the U.S. worth $200,000.

For U.S. gift tax purposes, Hope’s gift of U.S.-situs real property to Al, a U.S. citizen spouse, qualifies for the unlimited U.S. gift tax marital deduction.

EX. 8: LIFETIME GIFT OF U.S.-SITUS PROPERTY FROM NONRESIDENT ALIEN TO U.S. CITIZEN NON-SPOUSE

Ida, a citizen of Country X, has a cousin, Al, a U.S. citizen. They live in Country X. In 2017, Ida gives Al $200,000 (payable by check drawn on a U.S. bank).

Ida and Al are not married. Whether the U.S. gift tax applies to the transfer depends on whether the transferred property is situated in the U.S. The situs rules are complex and are not necessarily the same for U.S. estate tax and U.S. gift tax purposes. Ida’s gift to Al, cash held in a U.S. bank, is considered U.S.-situs “tangible personal property” for U.S. gift tax purposes. Therefore, after utilization of the $14,000 U.S. gift tax present interest annual exclusion available to Ida as a nonresident alien donor, the remaining $186,000 of the $200,000 gift is subject to U.S. gift tax payable in 2018 by Ida as a nonresident alien donor.

A nonresident alien may use the U.S. gift tax present interest annual exclusion ($14,000), but the Code prohibits a nonresident alien from using the $5,490,000 lifetime U.S. gift tax exemption that is available to U.S. citizens and resident aliens.

EX. 9: LIFETIME GIFT OF U.S.-SITUS PROPERTY FROM NONRESIDENT ALIEN TO NONRESIDENT ALIEN SPOUSE

Al and Jane are married citizens of Country X. In 2017, Al gives Jane real property located in the U.S. worth $200,000.

Al and Jane are married nonresident aliens, so Al’s gift of U.S.-situs real property to Jane does not qualify for the unlimited U.S. gift tax marital deduction. For U.S. gift tax purposes, Al’s gift to Jane is subject to the special U.S. present interest gift tax annual exclusion for lifetime transfers to non-U.S. citizen spouses. In 2017, this special annual exclusion is $149,000.

There is no lifetime gift tax exemption for a nonresident alien’s gift of U.S.-situs property to another nonresident alien. Thus, $149,000 of the $200,000 gift qualifies for the U.S. special present interest gift tax annual exclusion for non-U.S. citizen spouses. The remaining $51,000 of value is subject to U.S. gift tax. It is reportable and payable by Al as a nonresident alien donor on a U.S. gift tax return in 2018.

The examples above illustrate the general rules applicable to gratuitous lifetime transfers of property, or gifts. The following examples illustrate the general rules applicable to transfers at death:

EX. 10: TRANSFER AT DEATH FROM U.S. CITIZEN TO U.S. CITIZEN SPOUSE

Carl, a U.S. citizen and resident, is married to Dawn, also a U.S. citizen and resident. Carl dies in 2017 with a gross estate valued at $7,000,000. His will, revocable trust, and beneficiary designations leave his real and personal property to Dawn.

The U.S. imposes estate tax on the transfer of the taxable estate of every U.S. citizen or resident decedent. The taxable estate is reduced by the value of any property that passes from the decedent to a U.S. citizen surviving spouse. This is called the unlimited U.S. estate tax marital deduction.

Accordingly, the “date of death value” of the property passing from Carl to Dawn, $7,000,000, qualifies for the unlimited U.S. estate tax marital deduction. No U.S. estate tax is due upon Carl’s death. Furthermore, assuming no prior taxable gifts, Carl’s DSUE, $5,490,000 (the applicable amount for 2017), is “portable,” that is, transferable, to Dawn for use upon Dawn’s death in addition to Dawn’s available U.S. estate tax exemption.

The result would be the same if Carl, a resident alien, were married to Dawn, a US citizen.

EX. 11: TRANSFER AT DEATH FROM U.S. CITIZEN TO RESIDENT ALIEN (OR NONRESIDENT) ALIEN SPOUSE

Carl, a U.S. citizen and resident, is married to Evelyn, a citizen of Country X and U.S. resident (i.e., a “resident alien”). Carl dies in 2017 with a gross estate valued at $7,000,000. His will, revocable trust, and beneficiary designations leave his real and personal property to Evelyn.

Absent proper U.S. estate tax planning (i.e., “QDOT” structure described below), and assuming no prior taxable gifts, the property passing at Carl’s death to Evelyn, a resident alien spouse, would NOT be eligible for the unlimited U.S. estate tax marital deduction. Specifically, Carl’s available U.S. estate tax exemption, $5,490,000, would be consumed fully, leaving $1,510,000 subject to U.S. estate tax (top rate of 40%) with the balance passing to Evelyn.

If both Carl and Evelyn were married resident aliens, the result would be the same.

Why QDOT Planning Matters

In Example 11 above, proper planning with a “qualified domestic trust” (“QDOT”) could have preserved eligibility for the U.S. estate tax marital deduction and avoided the onerous U.S. estate tax imposed.

The QDOT is an exception to the non-U.S. citizen spouse exception to the U.S. estate tax marital deduction. The U.S. estate tax marital deduction operates to defer estate tax until the death of the surviving spouse. When Congress enacted the non-U.S. citizen spouse exception to the U.S. estate tax marital deduction (disallowing the U.S. estate tax marital deduction for non-U.S. citizen spouses), it did so to avoid the scenario where a non-U.S. citizen spouse inherits untaxed property then leaves the U.S. for a country without a treaty in place to facilitate the collection of U.S. estate tax upon the surviving spouse’s death.

In general, U.S. estate tax would be paid upon actual distributions of QDOT principal to the non-U.S. citizen spouse or upon the death of the surviving spouse. The QDOT enables deferral of the U.S. estate tax, as the exception to the U.S. estate tax marital deduction for non-U.S. citizen spouses does not apply when property passes to a properly drafted QDOT for the surviving spouse’s benefit.

To qualify as a QDOT, the trust must meet four general requirements:

• At least one trustee must be a U.S. citizen or a U.S. corporation;
• No distribution of trust property may be made unless the U.S. trustee has the right to withhold U.S. estate tax payable on account of the distribution;
• The trust must meet security requirements set out in the U.S. Treasury Regulations to ensure the collection of U.S. estate tax; and,
• The decedent’s executor must make an irrevocable election on Schedule M of IRS Form 706, the U.S. estate tax return.

The substantive provisions of a QDOT must meet the requirements of a marital trust intended to qualify for the U.S. estate tax marital deduction. A QDOT is often designed as a Qualified Terminable Interest Property (“QTIP”) martial trust of which the spouse is the sole beneficiary entitled to receive trust income. Other QDOT trust designs meeting the marital deduction requirements are available as well. It is essential that a QDOT is drafted with care. For example, to avoid being deemed a “foreign trust” under U.S. tax law, certain powers should be limited to U.S. persons and the trustee should be prohibited from moving the trust to a country beyond the reach of the U.S. courts.

QDOT planning is most effective when planning for gross estate values around, above, or expected to be above the U.S. estate tax exemption. However, if the date of death value of worldwide property owned by a U.S. citizen or resident is substantially below the U.S. estate tax exemption, then the U.S. citizen or resident may decide to leave such property outright to the non-U.S. citizen spouse, which would consume the decedent’s available U.S. estate tax exemption (illustrated in Example 11 above).

If the date of death value of property passing to the QDOT exceeds $2,000,000 (not adjusted for inflation) (known as a “large QDOT”), then additional requirements apply to secure payment of U.S. estate taxes attributable to the transferred property. At least one U.S. trustee must be a U.S. bank (several of which offer corporate trustee services to North Carolina residents). Alternatively, the U.S. trustee can furnish a bond or a letter of credit meeting certain conditions. These additional requirements also apply to smaller QDOTs where foreign real property holdings exceed 35% of trust assets.

If a decedent’s estate elected QDOT treatment and portability of DSUE on a U.S. estate tax return, then the estate also must report a preliminary DSUE that is subject to decrease as QDOT distributions occur or even modification by tax treaty. The DSUE amount is determined finally upon the surviving spouse’s death or other termination of the QDOT. The intersection of the QDOT rules and portability of unused estate tax exemption requires careful analysis upon filing the estate tax return and thereafter when planning for the non-U.S. citizen surviving spouse during the QDOT administration, including if the spouse attains U.S. citizenship.

Nonresident decedents are subject to U.S. estate tax on the value of U.S.-situs assets valued in excess of $60,000. The Code’s rules applicable to nonresident alien decedents are complex and should be analyzed with care. The analysis may include, for example, the types of U.S. property treated as U.S.-situs property subject to U.S. estate tax, whether any tax treaty modifies U.S.-situs property classification and the taxing jurisdiction, and whether a nonresident alien formerly a U.S. citizen or long-term resident alien is subject to the Code’s “covered expatriate” rules.

The following example illustrates these general rules and assumes no treaty between the U.S. and the foreign country.

EX. 12: TRANSFER AT DEATH OF U.S.-SITUS PROPERTY FROM A NONRESIDENT ALIEN TO A NONRESIDENT ALIEN SPOUSE

Carl, a nonresident alien, is married to Fran, also a nonresident alien. Carl leaves his worldwide assets, including U.S.-situs real and personal property, to Fran. His gross estate is valued at $7,000,000.

A nonresident alien decedent’s U.S.-situs property is subject to U.S. estate tax. Absent proper estate tax planning (i.e., QDOT structure described above), the U.S.-situs property passing at Carl’s death to Fran, a nonresident alien spouse, is ineligible for the unlimited U.S. estate tax marital deduction.

Specifically, Carl’s available U.S. estate tax exemption—only $60,000 for nonresident aliens—would be consumed fully, leaving $6,940,000 subject to U.S. estate tax (top rate of 40%) with the balance passing to Fran.

If Carl, a nonresident alien, were married to Fran—this time a U.S. citizen—the result generally would be the same except the U.S. estate tax marital deduction would apply only to U.S.-situs property.

In either scenario above, Carl’s executor must file IRS Form 706-NA, the U.S. estate tax return for nonresident alien decedents, and pay the U.S. estate tax due.

United States tax law is changing while families and businesses continue to move among countries. Estate planning for non-U.S. citizens is multidimensional and demands attention right here in North Carolina. The QDOT is a powerful U.S. estate tax planning technique to help certain non-U.S. citizen spouses defer taxes and preserve wealth in the face of such change.

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