Estate Planning for Clients Married to Non-US Citizens

In our increasingly globalized world, many American citizens have non-U.S. citizen spouses. This can present a serious problem when such couples consider estate planning. Under Internal Revenue Code Section 2056(d) the unlimited estate tax marital deduction is not available to non-citizen spouses of a deceased U.S. citizen. As a result, such couples may have significantly greater transfer tax exposure for Federal estate tax purposes.

Under current law, an individual can give away up to $5,490,000 during life or at death, which is known as the “Applicable Exclusion Amount”. However, amounts transferred in excess are taxed at a flat rate of 40%. Federal law also provides for unlimited gifts between spouses, so long as the transfer is made to a U.S. citizen spouse, which is commonly known as the “marital deduction.” As a result, married couples who are citizens can transfer unlimited amounts of property to each other during their lives or at death without affecting or exhausting their $5,490,000 Applicable Exclusion Amount.

However, the unlimited marital deductions does not apply to couples where one spouse is a non-U.S. citizen. Normally, non-citizen spouses must pay estate tax on any amount transferred in excess of the Applicable Exclusion Amount. Similarly restrictive limits also apply to lifetime giving to non-U.S. citizen spouses. However, a Qualified Domestic Trust (“QDOT”), drafted in accordance with the legal requirement under Internal Revenue Code Section 2056A, does provide a partial solution to this tax issue facing many clients who are married to a non-U.S. citizen spouse. More specifically, so long as the U.S. citizen spouse leaves their assets upon death to a qualifying QDOT trust, the Federal estate tax on those assets funding the QDOT is delayed.

An properly designed and funded QDOT plan, provides that upon the death of the U.S. citizen spouse, assets in his or her estate are transferred to the QDOT, instead of directly outright to the surviving non-U.S. citizen spouse. Federal estate tax on the amount transferred to the QDOT upon the death of the U.S. citizen spouse will still be owed upon the subsequent death of the non-U.S. citizen surviving spouse. However, during the life of the non-U.S. citizen surviving spouse, income generated from the assets in the QDOT can be distributed to the surviving spouse without the imposition of Federal estate taxation. In addition, there is also a partial exemption for distributions of principal to the surviving spouse provided such distributions meet the requirements of the “hardship exemption.”

If you are interested in learning more about estate planning strategies for individuals married to a non-U.S. citizen spouse, or would like to arrange a consultation with estate planning attorney Philip Levin, Esquire to discuss estate planning matters, please call The Levin Law Firm at (610) 977-2443.