Account for Your Noncitizen Spouse During Estate Planning
By: Barry E. Haimo, Esq.
December 2, 2014
In the United States, a citizen is permitted to transfer an unlimited amount of money or assets to his or her spouse without incurring gift tax liability. This is called the “unlimited marital deduction.” It represents the first step in tax planning for estates larger than the amount of the unified credit, which is presently over $5,000,000.
The drawback to this otherwise very generous provision is that noncitizens aren’t eligible to use the unlimited marital deduction. Unfortunately, Nigel learned this the hard way when his wife Maria passed away.
From Mr. Mom to Mr. Broke
Maria was a career woman when Nigel met her in London. She was there on business for her company where she worked as a vice president. He was more of what you might call a free spirit, and maybe that was what drew her to him.
They fell for each other immediately and completely, and when Maria’s company told her to come back less than a year later, she told Nigel to come with her and asked him to marry her. Nigel agreed, and within a few short months, they were wed and Maria was pregnant.
Businesswoman that she was, Maria worked until the last minute and took only as much time off as she needed to recover before returning to the office. Nigel was happy to play the stay-at-home dad, and this routine worked out very well for them.
Years later when Maria passed away, they had been together for just over 40 years and had three grown children, each with their own kids. Although Nigel still retained his accent and his love of dreary days and an ice cold pint, he was American through and through. Somehow, though, in all that time, Nigel never managed to become an American citizen. He just never saw the need.
Maria never thought much about it either, which is probably why her estate only had a simple provision to devise all of her money to her husband. She’d spoken with other executives at her company and learned about the benefits of doing this, but didn’t realize the spouse had to be an American citizen for it to work properly – a rule that was changed by Congress in 1988 to prevent noncitizen spouses from leaving the country without having to pay taxes on large estates.
Nigel should have received a substantial nest egg to see him through his golden years and gift to his children and grandchildren, but instead a large chunk of it was snatched away by the government to cover taxes. Money earned from years and years of Maria’s hard work was just gone in an instant.
It’s Up to You to Protect Your Noncitizen Spouse
What Nigel and Maria didn’t know was that they could have planned ahead to ensure Nigel received the full extent of his inheritance after Maria passed away. Had Maria and Nigel consulted with a trusts and estates attorney, they would have been advised to utilize a qualified domestic trust, or “QDOT”.
A properly structured QDOT works by deferring estate and gift taxation triggered upon death of a noncitizen spouse. Assets are transferred to the trust and administered by a trustee who must be a U.S. citizen or U.S. corporation.
In this way, you can essentially preserve assets that would otherwise have been taxed and lost and provide your noncitizen spouse with an income that will continue throughout his or her life. If you’d like to learn more about how these trusts can be administered and what you need to do, contact Haimo Law.
Barry E. Haimo, Esq.
Strategic Planning With Purpose
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