In Maryland, the marital deduction rule is an estate tax concept that allows for an individual, during his or her lifetime and after, to make unlimited gifts to his or her spouse. The use of the marital deduction rule is a common estate tax planning technique that sometimes limits the exposure to estate taxes upon the death of the first spouse. There are many estate planning techniques that utilize the marital deduction in a married couple’s planning to minimize or alleviate estate taxes.
Trust and estate planning, including marital deduction, can be difficult to understand. It is therefore important to have an experienced Maryland trusts lawyer, who can help guide you through the marital deduction rule and will work with your best interest in mind. A trust attorney can review the gift or the intended bequest, the status of the spouses, and determine whether or not it may qualify for a marital deduction.
Qualifying for Marital Deduction
In order for a couple to qualify for the marital deduction, the parties must be legally married at the time the gift is made, or at the death of the spouse. The gift giver, or the decedent, must be a US citizen. The gift must be an interest that does not terminate during the spouse’s lifetime or upon passage of time. In addition, for the marital deduction to apply, the gift must be a completed gift and it must actually pass from one spouse to the other.
The final hurdle, is that the property must pass to a US citizen. In essence, both spouses need to be US citizens to qualify for the marital deduction. In the event that the second spouse is not a US citizen, the only way for the deduction to be effective is if the assets pass to a qualified domestic trust (QDOT). There are very specific provisions that govern what that QDOT trust allows.
Rules of Transfer to a US Citizen Spouse
The rules of transferring to a spouse who is a US citizen is that the gift is made by a spouse during his or her lifetime, and that the gifting spouse is a US citizen. In addition, the gift or bequest is a permanent gift and it does not terminate during the spouse’s lifetime or upon passage of time. Also, it has to be a completed gift.
In addition, the titling of the property must actually pass from one spouse to the other spouse.
For example, if a married couple owns a property of tenants by the entirety, then the marital deduction is not on the full amount of the property. The marital deduction is on one half of the property amount because only one half of the property actually passes on death; the spouse is considered to have owned the other half individually.
Requirements for Unlimited Deductible Transfers
Unlimited deductible transfers may be made to a spouse if the following requirements are met:
- the parties must be married at the time that the gift is made or at the time of death,
- the gift giver or the decedent must be a US citizen and ipso facto the receiver must also be a US citizen,
- the gift is an interest that does not terminate either during the spouse’s lifetime or upon passage of time or any effect, the gift must be complete and not terminate.
When the gift or the class of the transfer is made as a testamentary transfer, the interest must be includable on the decedent’s gross estate; and finally, the title to the property must pass from one spouse to the other spouse.
Transfer to a Non-US Citizen
The marital deduction is only applicable to married couples who are both US citizens. In the event that one of the spouses is not a US citizen, assets passed to that spouse must go into a qualified domestic trust, which is also called a QDOT.
There are specific requirements for the creation of a QDOT. If done correctly, a QDOT allows assets at the death of the US citizen spouse to pass to the non-US citizen spouse and may defer estate taxes to the death of the second spouse. The idea is that the United States can then collect those estate taxes at the death or at the distribution of those assets outright to the non-citizen spouse.
Gift Tax Marital Deduction
Generally, US citizen spouses can make unlimited gifts during their lifetime between each other. This is not the case when there is one spouse who is not a US citizen. Instead, the annual exclusion is increased to $100,000.00 annually.
Individuals can give gifts up to the annual exclusion amount to any individual during their lifetime, which is currently $14,000.00 for the 2016 tax year, without filing a gift tax return. For spouses, that amount is increased to $100,000.00 currently.
Jointly Owned Assets
When US citizen spouses own assets jointly, only 50% of the value of the joint asset is considered to have been transferred to the surviving spouse as result of the death of the first spouse. For example, if a husband and wife own a property as joint tenants and the husband gifted his interest to his wife, then the husband is considered to have given a gift of 50% of the property. The remaining 50% is considered to be already owned by the wife.
However, that rule does not apply when one spouse is not a US citizen. Generally, it is considered that the non-US citizen made no contribution to the property, and the full value of the asset is considered to have passed rather than just one-half.
Benefit of an Attorney for a Non-US Citizen
There are more than just estate tax consequences for estate planning for non-US citizens. There are a number of complications that are applicable when both spouses are not US citizens. It is important to coordinate with an estate and trust attorney who can help create a comprehensive plan that addresses all of those issues.