A transfer to a surviving spouse who is not a U.S. citizen will not qualify for the marital deduction. An exception is made, allowing the marital deduction, in cases where the surviving spouse becomes a U.S. citizen between the date of decedent's death and the day on which the estate tax return is file, if he or she was a U.S. resident throughout the period from decedent's death until becoming a citizen.
Since the marital deduction is merely a deferral privilege, it presumes that the property of the first spouse to die will eventually be taxed as part of the estate of the surviving spouse. However, this critical presumption may well not be applicable when the surviving spouse is not a U.S. citizen, since there is a material risk that the original decedent's property will be removed from U.S. taxing jurisdiction before the death of the surviving spouse. In order to deal with this problem and to make the marital deduction available for taxpayers married to non-U.S. citizens, Congress devised a mechanism which would allow the marital deduction to be taken in cases where the surviving spouse is a non-U.S. citizen, but only if the marital deduction transfer is made in such a manner as will ensure eventual collectability of a transfer tax with respect to the property. Thus, the interest of the surviving spouse must be held through a Qualified Domestic Trust ("QDOT") meeting the requirements of Internal Revenue Code Sections 2056(d) and 2056A.
In general, a Qualified Domestic Trust ("QDOT") is any one of the normal marital
deduction trust types but with several additional requirements. The trust instrument must provide that at least one trustee must be a U.S. citizen or a U.S. corporation, and that no principal distributions may be made unless a trustee who is a U.S. citizen (or domestic corporation) has the right to withhold from such distribution the special taxes which may be applicable under Section 2056A(b). The decedent's executor must elect, in the estate tax return, to utilize the QDOT marital deduction. The requirements for QDOT status must be met as of the due date (including extensions) for filing the estate tax return. However, this is extended in the event that, as of such due date, a judicial proceeding has been commenced to change the trust provisions in such a manner as would meet the qualification requirements.
In general, instead of relying upon application of an estate tax upon the death of the
surviving spouse, Section 2056A(b) imposes a special tax on distributions of principal from
QDOT trusts. This tax is, in effect, a delayed supplement to the original estate tax
applicable when the first spouse died. Thus, each time that a principal distribution is
made from the QDOT (other than on account of hardship) during the lifetime of the
surviving spouse, a tax is payable from QDOT assets, essentially equivalent to the
additional estate tax which would have been payable by the original decedent's estate had
the amount now being distributed by the QDOT been included in the decedent's taxable
estate. A similar recalculation is made with respect to all property in the trust upon the
death of the surviving spouse (or upon the trust ceasing to qualify for QDOT status). Each trustee is personally liable for any such tax. A detailed set of requirements is set forth in Treasury Regulations. These include alternative requirements that the U.S. trustee be a bank, or post a bond or other security. The foregoing is not required, however, if trust assets are less than $2,000,000, no more than 35 percent of which is real estate located outside the United States, and all other assets are physically located in the United States. The regulations under Section 2056A are quite lengthy and detailed, and should
be consulted by anyone specifically concerned with utilization of a QDOT for marital
deduction qualification.