Marital Deduction Trusts and Expatriates – More Questions Than Answers

If an expatriate dies and leaves property to a U.S. citizen or resident spouse, can a marital trust be used to defer or avoid the transfer tax imposed under Section 2801? Both the Code and the Regulations seem to say yes, but a closer reading suggests that absent further regulatory relief, the answer is uncertain. And will the surviving spouse be taxable on the marital trust assets at his or her later death?

FACTS: Code Section 2801 imposes a transfer tax at the highest estate tax rate of estate tax on a covered gift or bequest to a U.S. citizen or resident. In the circumstances of death of an individual, a covered bequest is any property acquired directly or indirectly by reason of the death of an individual who, immediately before such death, was a covered expatriate. Code Section 2801(e)(1)(B). A covered expatriate is an individual who expatriated from the U.S. and met or exceeded certain asset or income thresholds at the time of expatriation. This tax is not a Chapter 11 estate tax (nor a Chapter 12 gift tax) – this will be an important fact.

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