QDOT: ESTATE PLANNING FOR NON-U.S. CITIZEN SPOUSE

In Canada as in the United States, the transfer of property from one spouse to the other at death is typically not subject to taxation. The tax rules differ between countries however.

In Canada, the Income Tax Act allows spouses to roll assets over to one another, on a tax-deferred basis. In the U.S., the Internal Revenue Code allows the surviving spouse to use what is called the “unlimited marital deduction” to avoid paying an estate tax on the assets held by the decedent.

This unlimited marital deduction allows the surviving spouse, in effect, to delay the payment of the estate tax on the assets received from his/her deceased spouse. There is a catch though. This deduction is only available to United States citizens. Uncle Sam wants to make sure that that a non-U.S. citizen surviving spouse (U.S. resident or not) will not avoid taxation in the United States. That is why the Qualified Domestic Trust (QDOT) has been created: to provide a vehicle where property can be transferred to a non-U.S. citizen spouse while deferring the payment of the U.S. estate tax.

The Internal Revenue Code imposes an estate tax on the estate of every decedent who is a citizen or resident of the United States. It also imposes estate tax on U.S. assets in excess of US$60,000 held by a non-U.S. resident who is not a U.S. citizen.

For 2012, there is an effective exemption limit of US$5.12 million dollars on assets held by a decedent; meaning that no U.S. estate tax will be payable if the value of worldwide assets held at death is less than US$5.12 million. However, that exemption level will expire on December 31st, 2012.

We do not know, as of today, what the exemption level will be for 2013 and beyond. If Congress cannot come to an agreement on the subject before the end of the year, the exemption will revert to its 2001 level (US$1 million).