With estate laws in flux, planning is especially difficult right now. But it is even more complex if you or your spouse isn’t a U.S. citizen. Special measures may be needed to avoid a large estate tax bill.

Under the rules of the landmark 2001 tax cut, the top tax rate on inheritances has been gradually reduced from 55% to 45%, while the maximum amount that can be passed along exempt from estate taxes has risen to $3.5 million in 2009. The estate tax is scheduled to expire in 2010 but will be revived in 2011, with a top rate of 55% and an exemption of $1 million.

Although Congress is expected to take action on a permanent fix for estate rules, no one knows exactly what will happen. The only thing that’s reasonably certain is that there will continue to be an unlimited marital deduction. That has been a constant of estate law—that a spouse may inherit unlimited wealth without any estate tax liability.

But that rule doesn’t apply if your spouse is not a U.S. citizen. Even permanent U.S. residents don’t qualify for the unlimited marital deduction; instead, they may owe estate tax on inherited assets that exceed the normal exemption for bequests to non-spouses. There are, however, a couple of ways for non-citizens to sidestep problems.

Reduce a taxable estate through lifetime gifts to a spouse. If the citizen spouse has substantially more wealth than the non-citizen, a series of gifts could shift the balance. Tax rules allow tax-free gifts to a non-citizen spouse of up to $133,000 in 2009. (The amount is indexed for inflation.) This is a strategy you’ll need to establish early, and it may work best as a complement to the second approach.

Establish a qualified domestic trust (QDOT). This trust lets a non-citizen spouse take advantage of the deceased spouse’s assets without paying estate tax. All trust income must be paid to the surviving spouse, and no estate tax is owed until the second spouse dies and the remaining trust principal is distributed to heirs (usually the couple’s children). To qualify for these advantages, the QDOT must meet these requirements.

• At least one trustee must be a U.S. citizen or a domestic corporation.
• The trust must be established no later than nine months after the first spouse’s death.
• The executor must make an election for the QDOT on the deceased spouse’s estate tax return.
• If QDOT assets exceed $2 million, the U.S. trustee must be a bank, or an individual trustee must furnish a bond or letter of credit equal to 65% of the value of trust assets.

If you or your spouse isn’t a citizen, timely estate planning could be crucial. We can work with you and your attorney to make sure your estate plan takes that special circumstance into account and helps you avoid unnecessary taxes.