Estate Planning for a Non Citizen Spouse
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Married couples in Massachusetts can take advantage of unlimited gifting between spouses. This makes planning to minimize estate taxes relatively straightforward in most situations.
If one spouse is a non citizen, however, the estate tax rules are different. It is still possible to protect your assets and provide for your spouse. You just have to plan a little more carefully. |
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Qualified Domestic Trust ("QDOT")
When both spouses are United States citizens, there is no limit on gifts between spouses. This means that when the first spouse dies, if you have set up the appropriate trusts, all of that spouse's assets can pass to the surviving spouse without estate tax.
If the surviving spouse is not a U.S. citizen, he or she does not qualify for the unlimited amount for spousal gifts. This means the citizen spouse cannot reduce their taxable estate by simply putting the assets in a typical trust.
If you are married to a non citizen, you will need what is called a Qualified Domestic Trust ("QDOT"). The trustee must be a United States Citizen. If the assets in the trust are m ore than $2 million, the trustee must be a United States bank or a domestic corporation.
The trust can pay the non citizen spouse income from the assets placed into it. Your spouse, however, cannot receive distributions of the principal unless the trustee withholds estate taxes from the distribution.
It is also possible for the trust to pay principal to the surviving spouse if there is a hardship. The surviving spouse must show an immediate need for health, maintenance, education or support. This can be either a need of the spouse or of someone they are legally obligated to support, such as their children. The surviving spouse will also need to be prepared to show that he or she does not have sufficient assets of their own to meet the need.
Finally, when the non citizen spouse passes, the assets in the trust will be taxed as if they had been part of the first spouse's taxable estate.
It is important for both spouses to know that the personal representative of the citizen spouse's estate will have to specify on the estate tax return that the trust should be treated as a QDOT.
If the surviving spouse is not a U.S. citizen, he or she does not qualify for the unlimited amount for spousal gifts. This means the citizen spouse cannot reduce their taxable estate by simply putting the assets in a typical trust.
If you are married to a non citizen, you will need what is called a Qualified Domestic Trust ("QDOT"). The trustee must be a United States Citizen. If the assets in the trust are m ore than $2 million, the trustee must be a United States bank or a domestic corporation.
The trust can pay the non citizen spouse income from the assets placed into it. Your spouse, however, cannot receive distributions of the principal unless the trustee withholds estate taxes from the distribution.
It is also possible for the trust to pay principal to the surviving spouse if there is a hardship. The surviving spouse must show an immediate need for health, maintenance, education or support. This can be either a need of the spouse or of someone they are legally obligated to support, such as their children. The surviving spouse will also need to be prepared to show that he or she does not have sufficient assets of their own to meet the need.
Finally, when the non citizen spouse passes, the assets in the trust will be taxed as if they had been part of the first spouse's taxable estate.
It is important for both spouses to know that the personal representative of the citizen spouse's estate will have to specify on the estate tax return that the trust should be treated as a QDOT.
GIfts Between Spouses
If one spouse is a non citizen, the limit for annual gifts is $155,000. This is in contrast to the unlimited amount that citizen spouses can give to one another. This can create additional complications when it comes to jointly owned property.
For example, if the couple owns a home that was primarily paid for by the citizen spouse, the non citizen spouse's ownership interest could be considered a gift in excess of the annual exemption amount. Additionally, the entire value of the house could be credited to the citizen spouse at his or her death, increasing the amount of the taxable estate.
For example, if the couple owns a home that was primarily paid for by the citizen spouse, the non citizen spouse's ownership interest could be considered a gift in excess of the annual exemption amount. Additionally, the entire value of the house could be credited to the citizen spouse at his or her death, increasing the amount of the taxable estate.
Life Insurance Proceeds and the Non Citizen Spouse
Life insurance proceeds are part of your taxable estate. This means you have to plan for them like you would for any other asset. If you are married to a non citizen and create a QDOT for your spouse, you can name the QDOT as the beneficiary on your life insurance policy to avoid taxation on the proceeds.
If you have not changed the beneficiary designation, the non citizen spouse can still elect to disclaim the proceeds and roll them over into a QDOT. He or she can also collect the proceeds directly, but will have to pay estate tax on them if they are above the state or federal estate tax exemption amount.
If you have not changed the beneficiary designation, the non citizen spouse can still elect to disclaim the proceeds and roll them over into a QDOT. He or she can also collect the proceeds directly, but will have to pay estate tax on them if they are above the state or federal estate tax exemption amount.
Alternatives to a QDOT
Federal law does provide a "grace period" for the surviving spouse. If they become a United States citizen within nine months of the first spouse's death and prior to filing the estate tax return, the estate will be treated as if both spouses were citizens at the time of death.
Why the Rules are Different for Non Citizens
These rules are not the result of some anti-immigration policy. They exist for the practical reason that the government wants to make sure all taxes are paid. For a married couple who are both citizens, the surviving spouse will be able to avoid estate taxes when the first spouse dies, but eventually those assets will be part of the surviving spouse's taxable estate.
Where the surviving spouse is not a United States citizen, there is a higher likelihood that they will move back to their home country and therefore take all of the marital assets outside of the jurisdiction of state and federal taxing authorities.
Where the surviving spouse is not a United States citizen, there is a higher likelihood that they will move back to their home country and therefore take all of the marital assets outside of the jurisdiction of state and federal taxing authorities.
How to Plan for a Non Citizen Spouse
Planning to minimize estate taxes is still possible if your spouse is not a citizen. The plan that is right for you depends on your family's situation and goals.
If your spouse is in the process of seeking United States citizenship, you may still want to set up a QDOT in case something happens to you before their citizenship is final. Remember that there is still a "grace period" of nine months after your death for your spouse to become a citizen.
If your spouse does not intend to become a United States citizen, both of you should discuss the pros and cons of a QDOT. If the limitations associated with this kind of trust are not what you want, you can still pass assets to your spouse. You will just have to account for estate tax liability in your planning if your assets exceed $1 million (for Massachusetts estate tax).
If your spouse is in the process of seeking United States citizenship, you may still want to set up a QDOT in case something happens to you before their citizenship is final. Remember that there is still a "grace period" of nine months after your death for your spouse to become a citizen.
If your spouse does not intend to become a United States citizen, both of you should discuss the pros and cons of a QDOT. If the limitations associated with this kind of trust are not what you want, you can still pass assets to your spouse. You will just have to account for estate tax liability in your planning if your assets exceed $1 million (for Massachusetts estate tax).
How Our Estate Planning Lawyers Can Help
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All of these stories are adapted from real clients who had very real shortcomings in their existing estate plans. The good news is that these are easy problems to fix. We are ready to help. We understand this can be a difficult issue to tackle, so we have designed our process to make it as easy as possible for you to get the plan in place that protects you and your family and accomplishes your goals. You can use the button below to schedule a free information call, or simply give us a call at 781-784-2322.
