Most couples in which one partner is a non-U.S. citizen can create an estate plan much like all others – they can hold property in joint form, inherit from each other via a will or trust, be named beneficiaries of their spouse’s life insurance and retirement accounts, and serve as each other’s executors.
Estate taxes are also not a consideration so long as the estate is below the federal estate tax threshold for an individual ($5,450,000 in 2016). However, if the estate is above that amount and one spouse is not a U.S. citizen, the unlimited marital deduction – which allows an individual to transfer up to the entirety of their estate to their spouse free from estate tax – will not apply, unless the assets are placed in a Qualified Domestic Trust (QDOT).
The reason for denying non-U.S. citizen spouses the benefit of the unlimited marital deduction is to prevent non-citizens from leaving the U.S. with large sums of money and never paying U.S. estate taxes on that amount. If the first spouse to die is the U.S. citizen, a QDOT will permit the non-citizen spouse to use the income and any needed principal for the rest of their life.
If the trustee of a QDOT makes a distribution of principal to the surviving spouse, the amount of that distribution will be subject to estate tax unless payments are made due to an “immediate and heavy financial need” (health, maintenance, education, or support of the non-citizen spouse or his/her legal dependents). Estate taxes will be due on any amount remaining in the QDOT after the non-citizen spouse passes away.
A QDOT should contain all assets that exceed the federal estate tax exemption amount. To qualify, the trust must meet certain requirements:
- At least one trustee must be a U.S. citizen or a domestic corporation (trust company or bank)
- If the assets in the QDOT exceed $2 million, one of the trustees must be a U.S. bank or an individual who has posted a bond or a letter of credit to the IRS equal to 65% of the value of the assets in the trust
- If the assets in the QDOT are under $2 million, a U.S. bank need not be trustee and an individual trustee need not post bond so long as foreign real estate comprises no more than 35% of the trust’s assets
- The executor/trustee must elect to treat the trust as a QDOT on the U.S. citizen-spouse’s estate tax return
- The QDOT must provide that all income is to be distributed to the surviving non-citizen spouse
For couples hesitant about creating a QDOT, other estate planning options exist to reduce estate taxes, such as an Irrevocable Life Insurance Trust or other irrevocable trust. In addition, keep in mind that if the non-citizen spouse obtains citizenship before the federal estate tax return deadline, the unlimited marital deduction will become available to them (however, in that case they will be subject to income tax on their worldwide income).
Consult an experienced estate planning attorney at Moskowitz, LLP to create an estate plan that meets your specific needs.