The unlimited marital deduction allows married persons to pass on as much of their wealth as they see fit, free of estate taxes. Taxes will eventually have to be paid on the property once the surviving spouse dies. There are, of course, a number of estate planning techniques that help couples to make the most out of their money while minimizing taxes.
As a recent article in the Star-Ledger points out, though, the unlimited marital deduction is not available to all couples. When property is transferred to a surviving non-U.S. citizen spouse, an estate tax will be owed on the amount that exceeds the deceased spouse's estate tax exemption amount.
Through the end of 2012, the federal exemption amount is $5.12 million, and is $675,000 in New Jersey. So a non-citizen spouse inheriting over that amount will have to pay estate taxes on the excess amount. In addition, there are limits to how much a citizen can leave to a non-citizen spouse. These rules may be subject to modifications by tax treaties in place between the U.S. and the non-citizen spouse's country of citizenship.
These limitations can be bypassed, though, by means of a qualified domestic trust. Such a trust must, however, be set up properly. Included in the requirements are that no distribution can be made from the trust, except for income, unless the trustee, who is a U.S. citizen or a corporation, has the right to hold back estate taxes from the distribution.
The trust must meet Treasury regulations concerning the collection of taxes. In addition, the executor must elect on the deceased spouse's estate tax return to the trust as a qualified domestic trust.
Couples who feel they could benefit from a qualified domestic trust should consult an estate planning attorney.
Source : nj.com, "Ask the Biz Brain: What's the tax impact to immigrant whose spouse, a U.S. citizen, dies? ," Karin Price Mueller, April 3, 2012