By: Barry E. Haimo, Esq.
February 6, 2020
Estate Planning Concerns When Spouse Is Not A U.S. Citizen
Estate planning can already often be a daunting and complicated process. However, it is one that must be done. But what if only one of you is a naturalized U.S. citizen?
For the most part, your estate plans probably won’t be much different than any other couple who both enjoy citizenship. There are, however, three key estate planning concerns when one spouse is not a U.S. citizen.
Concern No. 1: Limitations on Marital Exemptions
Usually, when someone loses a spouse, all assets left to them are free from federal estate tax. It is known as an unlimited marital deduction and is an addition to their normal individual exemption. However, it does not apply to inheritance by spouses who are not U.S. citizens.
Concern No. 2: Joint Property Is Not Assumed
Joint property is typically assumed to belong equally to each spouse, but when one of you isn’t a U.S. citizen, that’s not the case. Instead, the government looks at actual (proven) monetary contributions in order to determine the percentage of ownership — not just a 50/50 split.
Concern No. 3: Gifting Becomes Complicated
One solution to the issues with joint property is to look at joint assets as gift values from the citizen spouse to the non-citizen spouse. However, even gifting has limits and can become quite complicated when a couple has multiple high-value assets.
Protecting Your Joint Assets When Only One Spouse Is a Citizen
There are generally two paths you can take as a couple when it comes to protecting your joint estate if only one of you is presently a naturalized citizen. The person without citizenship can try to become a citizen…or you can consider establishing a qualified domestic trust.
The Process of Becoming a U.S. Citizen Can Take a Year or More
If your spouse is a naturalized citizen by the time your first tax return after death is due, there will be no question about your jointly-owned property and gift limitations. An experienced estate planning attorney will understand the impact of our current political climate on this process in recent years, though.
Whereas in the past non-citizens could reasonably expect the naturalization process to take approximately six months, wait times have reportedly doubled on average — and are sometimes longer.
So, if your non-citizen spouse isn’t already well on the road to naturalization, your estate planner may suggest a qualified domestic trust in the meantime…or instead.
A Qualified Domestic Trust Is Effective Upon Establishment
Besides the extended waiting period for becoming a U.S. citizen these days, there are plenty of other reasons your spouse may not want to be naturalized.
In any case that involves one non-citizen spouse, an estate planning attorney is likely to suggest they consider a qualified domestic trust (or QDOT). Similar to other trusts, instead of directly devising your property to your spouse, you assign your assets to this trust and name your spouse as the beneficiary.
That way, your spouse can receive any income the trust generates tax-free. The difference is, with this kind of trust, there can be no other beneficiaries while your spouse is alive. Moreover, should the actual property within the trust (the principle) be distributed, taxes will still be owed on it except under special circumstances.
To successfully accomplish your estate planning goals, you’ll want an experienced legal professional to ensure your trust adheres seamlessly with current tax codes.
Barry E. Haimo, Esq.
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