Vermont Bar Journal, Vol. 40, No. 2 Spring 2015, Vol. 41, No. 1 | Page 20

International Tax Rules Frequently Encountered in Vermont
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ties for a failure to report such income can
be sufficiently stiff that the tax and penalties could absorb almost the entire trust
distribution.
It bears mentioning that foreign trust reporting rules need to be considered when
establishing an estate plan for a Vermont
couple, one of whom is not a citizen of the
United States. A standard device used to
take advantage of the marital deduction is
the QDOT, discussed below.
7. QDOTs and the Gift Tax
Marital Deduction

As the narrative goes in Washington,
when the US Congress was trying to raise
revenue for one of its spending bills in 1988,
it decided that it could get a good revenue score by denying an unlimited estate
and gift tax marital deduction to US resident individuals who were not US citizens.
To avoid a treaty claim that the denial was
discriminatory, the deduction was granted
if the marital transfer was made to a Qualifying Domestic Trust (QDOT). The logic for
giving the QDOT measure a high revenue
score was that US residents who were not
US citizens could receive property at death
or by gift from his US citizen spouse without
gift or estate tax and then leave the country. The unlimited marital deduction for
non-citizen spouses was perceived to deny
the US Treasury the ability to impose its estate or gift tax on such transfers of wealth.
International tax practitioners will be aware
that the US Congress then proceeded to
impose an estate and gift exit tax, which
is discussed below, so the QDOT measure
may be overkill. In any case, Vermont practitioners should be aware that federal and
presumably Vermont law (under the federal/state estate tax conformity rule, 32
VSA §7475) deny an unlimited estate tax
marital deduction for a transfer of wealth
from a US citizen spouse to a non-citizen
spouse unless the marital transfer is structured as a QDOT. A QDOT is a trust that is
designed to capture subsequent principal
distributions from the QDOT to the nonUS-citizen surviving spouse and make them
subject to the federal estate tax. Because
a QDOT could become subject to some of
the foreign trust reporting rules of the SBJPA, drafters should be aware of foreign
trust reporting rules when deciding how to
settle such a trust.
For federal gift tax purposes, Vermont
practitioners should be aware that the normal unlimited gift tax marital deduction is
replaced by a $147,000 per calendar year
(2015) limit on such lifetime transfers. This
annual limit is adjusted for inflation. Under
these rules, transfers of property from a
US citizen spouse to a non-citizen spouse
for estate planning purposes will trigger a
federal gift tax if the value received by the
THE VERMONT BAR JOURNAL • SPRING 2015

non-US citizen spouse exceeds $147,000.
A special rule applies to spousal joint tenancies: no gift results upon creation, but
on the death of the US citizen spouse, the
entire value is deemed to pass to the noncitizen spouse. This transaction may go
unnoticed for a considerable period, and
the transaction may unravel at the point at
which the Form 706 is audited by Vermont
or the federal government. Indeed, there
may be an inchoate estate tax lien on the
real p