US Citizens Get a Big Tax Break That Non-citizens Do Not Get.
If both partners of a married couple are US Citizens, then the first spouse to die can leave any amount of money to the survivor, and this is entirely free of the estate tax. This is called an unlimited marital deduction. However, this unlimited marital deduction will not apply if the surviving spouse is not a citizen. None the less, the surviving non-citizen spouse can still receive the maximum about exempted from inheritance tax.
To avoid paying estate tax on the amount over the exemption amount at the death of the first spouse, couples have two main options: (1) get US citizenship for the non-citizen spouse, or (2) create a QDOT trust.
With a QDOT (Qualified Domestic Trust) at the first spouse’s death, assets go to the trust instead of the surviving non-citizen spouse. The survivor receives benefits from the trust assets but doesn’t own them. When the second spouse dies, assets pass to other beneficiaries named in the trust documents typically, the couple’s children. The trustee, who has control over the trust assets, must be a US citizen, and if the trust assets exceed 2 million dollars, one of the trustees must be a US bank.
A surviving spouse is entitled to receive any income earned by trust assets, and usually, all income is distributed to the survivor at the very least annually; however, these distributions are subject to income tax, but no estate tax.
If the spouse needs money relating to health, maintenance, education or support either his or her own or that of someone he or she is legally obligated to support, the distribution of trust funds could qualify for a hardship exemption if the surviving spouse doesn’t have other reasonably available liquid assets. If trust assets themselves, are distributed to your spouse, however, the estate tax will probably have to be paid on that property.
Another option is a lifetime gift. This allows the US Citizen Spouse to gift to the non-US Citizen Spouse up to $157,000, as of 2020, every year.