One of the most common motives people have for creating an estate plan is protecting a spouse in the event of their death or incapacity. Most of the time, protecting a spouse is among the easiest estate planning goals to achieve; however, when your spouse is not a citizen of the United States it becomes more difficult to achieve such a seemingly simple goal. The Nashua estate planning attorneys at DeBruyckere Law Offices explain how to provide for your spouse if he/she is not a citizen.
Estate Planning Concerns When Your Spouse Is a Non-Citizen
Why does it matter if your spouse is a non-citizen? After all, you can gift assets to anyone you want, without regard to their citizenship status, right? While that is, indeed, true, there are ancillary considerations that potentially make gifting a non-citizen spouse problematic. Specifically, the U.S. tax laws can create a problem when you fail to take your spouse’s citizenship status into account when creating your estate plan.
In the normal course of events, you may plan to leave your entire estate to your spouse when you die, counting on your spouse to then pass down whatever remains of your combined assets to your children upon his/her death. You can normally do this without worrying about federal gift and estate taxes because of the unlimited marital deduction. The unlimited marital deduction allows a spouse to gift an unlimited amount of assets to a surviving spouse tax-free. The theory behind the deduction is that those assets will eventually be taxed when the surviving spouse passes away in the future.
The problem, however, is that the unlimited marital deduction is not available to a non-citizen. The rationale behind excluding non-citizens from the deduction is the fear that a non-citizen could easily leave the country, taking the assets with him/her, without Uncle Sam the tax due on the transfer of wealth. Once the assets leave the country, they are out of reach of the U.S. tax authorities. By excluding non-citizens from using the marital deduction, assets remain subject to taxation at the time they are gifted, just as they would be if gifted to anyone other than a spouse. The federal gift and estate tax levies a 40 percent tax on the value of lifetime gifts coupled with the value of assets owned by a taxpayer at the time of death beyond the current lifetime exemption limit. If the marital deduction is not available, your estate could incur a significant tax obligation if you failed to plan ahead.
Is a QDOT Trust the Answer?
One popular solution to the non-citizen spouse dilemma is to create a Qualified Domestic Trust (QDOT) and transfer assets intended to help provide for your non-citizen spouse into the trust. Your spouse will be entitled to the interest from the trust assets but will not own the assets outright nor can your spouse access the principal held by the trust absent a showing of extreme hardship. An extreme hardship requires your spouse to show an “immediate and substantial” need for money relating to “health, maintenance, education or support” of either your spouse or someone your spouse is legally obligated to support, such as a child. Upon the death of your surviving spouse, the assets held in the trust will be distributed to the beneficiaries named in the trust, usually children and/or grandchildren. If any federal and/or state estate taxes are due at that time they will need to be paid at the time of distribution. Using a QDOT allows you to provide for your non-citizen spouse without potentially losing a significant portion of your assets to gift and estate taxes.
Contact Nashua Estate Planning Attorneys
If you have additional questions or concerns, please contact the Nashua estate planning attorneys at DeBruyckere Law Offices by calling our New Hampshire office at (603) 894-4141 or our Massachusetts office (978) 969-0331 to learn more or visit our website at https://dadlawoffices.com .
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