You, your noncitizen spouse and your estate plan A major benefit of getting married — in addition to the love and companionship, of course — is that married couples can take advantage of the unlimited marital deduction for estate tax purposes. This powerful estate planning tool allows you to pass an unlimited amount of assets (through lifetime gifts or bequests at death) to your spouse free of gift and estate taxes. The only snag is that your spouse must be a U.S. citizen. What to do if your husband or wife isn’t a U.S. citizen? The most effective solution is for your noncitizen spouse to become a U.S. citizen. If that’s not possible (or not otherwise desirable), you can preserve marital deduction benefits using a qualified domestic trust (QDOT). QDOT defined With a QDOT, the assets you designate are transferred on your death estate-tax free to the trust. Your noncitizen spouse receives the trust income during his or her lifetime. When your spouse dies, the assets remaining in the trust are taxed as though they had been included in your estate at the time of your death, and pass to your designated beneficiary or beneficiaries. At least one of the QDOT’s trustees must be a U.S. citizen or a domestic corporation, such as a bank or trust company. Additional requirements To ensure estate tax is paid, additional security measures are required if the value of assets you transfer to a QDOT exceeds $2 million. In determining whether the $2 million threshold is met, your executor may elect to exclude up to $600,000 in value attributable to a personal residence (including furnishings) the QDOT owns. Additional security measures also are required for a QDOT valued at $2 million or less if more than 35% of its assets consist of real property located outside the United States. You may satisfy the additional security requirements in one of three ways: 1. The trust provides that at least one trustee is a U.S. bank or a U.S. branch of a foreign bank. 2. The U.S. trustee furnishes the IRS with a bond in an amount equal to 65% of the fair market value of the trust assets (determined without regard to indebtedness). 3. The U.S. trustee supplies the U.S. government with an irrevocable letter of credit in an amount equal to 65% of the fair market value of the trust assets (determined without regard to indebtedness). Consult with your professional estate planning advisor to determine which option is best for you. Other considerations Bear in mind that QDOTs have some significant disadvantages. For example, except in cases of hardship, your noncitizen spouse can’t receive distributions of principal unless the trustee withholds estate taxes. Plus, any assets remaining in a QDOT when your noncitizen spouse dies are taxed as if they had been included in your taxable estate — effectively wasting the exemption that would otherwise be available if your spouse were a citizen. If you die without having established a QDOT, your noncitizen spouse can either become a U.S. citizen or establish his or her own QDOT to hold the assets before the due date of your federal estate tax return. Achieve your goals No matter what the circumstances, estate planning can be difficult. If your spouse isn’t a U.S. citizen (or you aren’t), you need to be especially careful when drafting your plan to ensure it will achieve your goals. Keep in mind that several countries have treaties with the United States that address estate taxes, so before establishing a QDOT you should determine whether there is an applicable treaty. Your estate planning professional can help you determine if a QDOT is right for you and your spouse. • |