Charles Rubin considers the situation when an emigrant dies and leaves property to a U.S. citizen or resident spouse and whether or not a marital trust can be formed in order to avoid a transfer tax imposed by Code Section 2801. He writes,
Does Section 2801(e)(3) allow for the deduction? Likely yes, but maybe no. To get the deduction under Code Section 2056 if we treat our expatriate as a U.S. person, a valid QTIP election on an estate tax return is needed – we now circle back to the question of how one can make a QTIP election on an estate tax return if the assets are not actually included in the gross estate of the decedent. Perhaps a constructive inclusion of the subject assets in the decedent’s gross estate, along with a constructive election with the completion of a Schedule M that includes the foreign situs assets, will suffice. One would suppose that this is the proper result, per the inclusion of Section 2801(e)(3) in the Code. That being the case, at a minimum, the proposed regulations when finalized should remove the requirements for a “valid” QTIP election and allow for a constructive QTIP election that includes the non-U.S. situs assets for which a deduction is sought – otherwise the requirements of the regulation cannot be satisfied.
Here is perhaps a more interesting question – if the marital deduction is allowed, what happens at the subsequent death of the surviving spouse? Will the assets be subject to estate tax in the surviving spouse’s estate under Code Section 2044? That would be a stretch – Code Section 2044 by its terms applies only if there was a deduction taken at the first spouse’s death under Section 2056(b)(7) – “… [t]his section applies to any property if… a deduction was allowed with respect to the transfer of such property to the decedent… under section 2056 by reason of subsection (b)(7). At best, there is no deduction that occurs, only an exclusion of assets from property subject to tax under Code Section 2081. See Code Section 2081(e)(3). Alternatively, can Code Section 2081(e)(3) be read expansively to impose an estate tax on the surviving spouse under Code Section 2044? That, too, would be quite a stretch since all Code Section 2081(e)(3) says is to exclude certain property from a covered bequest – it says nothing about imposing estate taxes on the surviving spouse.
Read his entire opinion here: Marital Deduction Trusts and Expatriates – More Questions Than Answers
Posted by Allison Trupp, Associate Editor, Wealth Strategies Journal