What sort of estate planning is recommended for people with a non US resident partner? In this post, San Francisco Bay Area lawyer John C. Martin discusses three reasons that individuals with a non US resident spouse should consider estate planning with QDOTs, and how to prevent numerous risks.
What kind of estate planning is advisable for individuals with a non United States resident spouse? In the majority of cases, a decedent’s estate may be transferred to an US person spouse with no estate tax, thanks to a high exclusion quantity for US resident and long-term resident decedents in 2009 and an endless marital deduction. When a decedent’s partner is a not a United States resident, nevertheless, the estate can not declare the marital deduction– regardless of the citizenship of the decedent. That’s not a problem if a decedent’s estate is smaller than the relevant exclusion amount, or if the surviving partner becomes an US citizen prior to submitting an estate tax return. But what if you are a non resident alien and have a suitable exclusion quantity of only $60,000? Or, what if your spouse doesn’t acquire citizenship in time?
Under IRC code sections 2056(d) and 2056A, a Certified Domestic Trust (QDOT) is the only instrument by which the marital reduction might be claimed when one’s partner is not an US citizen at the time of filing an estate tax return. A QDOT makes it possible for families with a low exemption quantity or large estate to postpone estate tax, provide income to a surviving spouse, and develop valuable time throughout which a making it through spouse might obtain US citizenship. The IRS enables QDOTs because they postpone the estate tax up until the death of the 2nd partner: Tax deferment lowers the possibility that a surviving partner will declare a marital deduction and consequently pass away in a foreign nation, therefore preventing all US tax. In this short article, we go over 3 reasons that individuals with a non US person partner ought to think about estate planning with QDOTs, and how to prevent several mistakes.
First Reason: QDOTs Interest Individuals with Properties in excess of their Relevant Exclusion Amount.
Non Resident Aliens with United States Assets over $60,000. In addition to other methods, QDOT planning ought to be seriously considered by non resident aliens with properties found in the United States that go beyond $60,000. Non resident aliens can move just $60,000 in 2009 without triggering estate tax at the rate of 45%. With a QDOT, however, the estate tax is deferred till the death of the second spouse.
US People and irreversible locals with non US Resident partners. If a United States Person or long-term homeowner’s estate is under $3.5 million upon a death in 2009, the total might pass without tax no matter the spouse’s citizenship. Additionally, households with estates above $3.5 million should consider the use of a QDOT together with other estate planning techniques in order to protect the marital deduction. Families should bear in mind that in 2011, unless Congress acts, the suitable exemption quantity will drop to $1 million. If this holds true, lots of households with estates above $1 million might one day gain from QDOT planning. As it stands, nevertheless, future changes in the law are unsure.
Surviving Spouse is a Non Local Alien. Another issue emerges when an US resident or permanent homeowner has an estate listed below the appropriate exclusion quantity, but where the enduring spouse is a non resident alien. In such cases, the surviving spouse’s death might incur considerable estate tax liability upon his/her death. As mentioned above, non resident aliens can move just $60,000 in 2009 without setting off estate tax at the rate of 45%. Such individuals may gain from QDOTs and other estate planning for global households.
Second Reason: Life Time Earnings and Estate Tax Deferral
To see the benefits of income and tax deferral, consider the copying. Let’s presume that Ronald, a United States long-term homeowner, passes away in 2009, survived by 2 children and his wife, Marie. Marie is not a United States resident, and Ronald’s estate totals up to $5.5 million. For the purposes of this example, we are assuming that there is no joint property. Ronald’s exclusion amount is used to shield $3.5 million from estate tax, which is moved to his children through a trust created prior to Ronald’s death. The remaining $2 million passes to Marie, in the type of a $1.5 million personal house in California and $500,000 in valuable securities. Ronald did not establish a QDOT during his lifetime. Hence, the $2 million would usually be taxable because it exceeds Ronald’s exemption quantity and Marie doesn’t certify for the marital deduction. Marie works with a lawyer to create a QDOT that pays a 5-percent unitrust interest to hold the properties. Marie subsequently transfers the assets to the QDOT prior to submitting the estate tax return. She pays the trustee fair market price rent in order to reside in the house, and the trustee pays Marie $100,000 annually. Marie gets additional circulations from the QDOT in order to pay the trust’s costs, and to provide funds in case of difficulty for herself or her kids.
In the above example, Marie’s QDOT enables for deferral of the estate tax. Due to the fact that Marie has actually prompt moved possessions to a QDOT, the transfer of assets from Ronald’s estate is exempt to estate tax at the time of Ronald’s death. In reality, in the above example all federal tax has been avoided at the very first death through using appropriate planning. The estate tax will then be delayed until the death of the 2nd partner– a tremendous advantage for Marie throughout her life time. Nevertheless, this does NOT imply that the surviving spouse will be able to offset the tax on QDOT assets with her applicable exemption amount at the time of her death. Presuming Marie never ends up being a United States citizen, an estate tax will be imposed upon the QDOT properties by referral to Ronald’s estate. She would at least have the benefit of QDOT income throughout her lifetime.
Third Factor: A QDOT Buys Time
The QDOT in the example above purchases time for Marie to acquire her US citizenship. If Marie ultimately becomes an US resident prior to her death, the regular rules that apply to US citizen spouses for establishing the marital deduction would apply. Appropriately, the entire $5.5 million can pass to the children without the evaluation of estate taxes upon Marie’s death. Marie should be a local for the whole period after Ronald’s death in order to avoid deferred estate tax. The US trustee must likewise timely inform the IRS of Marie’s acquisition of citizenship.
During the time it takes Marie to obtain her citizenship, she can get certain distributions that are exempt to a QDOT tax enforced under IRC area 2056A(b). She can receive earnings, such as a unitrust quantity in between 3-5 percent. In the above example, Marie and her lawyer agreed upon the maximum portion of 5%. Marie can not, however, get capital gains or a distribution of principal without liability for QDOT tax. Second, Marie can get a distribution without QDOT tax of the principal on the occasion that she suffers financial hardship and has no other sensible source of funds for her or her children’s health, maintenance, and support. Third, Marie can receive distributions from the QDOT devoid of QDOT tax for the payment of certain expenses and earnings taxes generated by the QDOT. Finally, as soon as Marie ends up being an US citizen, distributions can be made without imposition of the IRC section 2056A(b) QDOT tax.
Consider the Lots Of Pitfalls
The Rules. From Marie and Ronald’s case, we might look some of the myriad rules governing QDOTs. Importantly, at least one of the trustees needs to be a United States resident individual or corporation, who has the authority to keep amounts from circulations of principal in order to pay a special QDOT tax.
The QDOT can not make any distributions of primary unless unique withholdings are satisfied in order to pay taxes. Additionally, in circumstances where the QDOT assets are considerable, it is required that a minimum of among the United States trustees be a bank or that the US trustee post a substantial bond based upon the date of death value of QDOT assets. In addition, due to the fact that Marie may get United States citizenship while the QDOT remains in place, it must be prepared flexibly so that it can react to such modifications. This is not an exhaustive list of requirements for a valid QDOT, but it might give you some concept of the lots of rules that need to be followed.
Not a Panacea. While a QDOT has several advantages, it should not be treated as a one-size-fits-all solution. Particular assets may not be qualified to transfer to a QDOT, and the cost of developing and maintaining the QDOT might be high relative to its advantages. Furthermore, the requirement of an US trustee always results in a loss of control for the non-citizen spouse, and possible additional expenses. Expected appreciation of the QDOT possessions, the quantity of final tax to be paid at the 2nd partner’s death, the capability to make tax-free circulations under a hardship exemption throughout the partner’s life, and the probability of the spouse’s acquisition of United States citizenship will all influence whether tax deferral under a QDOT deserves the discomfort and cost. In some circumstances, people might consider the payment of a tax on the death of the first partner to outweigh the expense and intricacy associated with a QDOT.
Individuals and their households need to also think about the unique guidelines governing joint property at death for people with non United States resident spouses. Under IRC code area 2040(a), a contribution tracing guideline might use when one’s partner is not a United States person, resulting in the inclusion of all joint property in the taxable estate of the decedent. International households constantly require to keep the function of foreign jurisdictions in mind. Lots of civil law nations do not recognize trusts, potentially leading to unfavorable tax effects in a different country. The advantages of an estate tax treaty may make a QDOT unneeded.
Conclusion: Consider Your Options
QDOTs are one tool among numerous which are readily available to people with non US person partners. A suitable method ought to likewise think about gifting and alternative testamentary devices. In all cases, the estate plan should be properly collaborated with appropriate treaties, guidelines from the foreign jurisdiction, and estate planning files already in place. Preferably, the advice and help of both foreign and domestic counsel must be sought.
IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the Internal Revenue Service, we notify you that any U.S. tax advice contained in this communication (consisting of any attachments) is not intended or composed to be utilized, and can not be utilized, for the purpose of (i) preventing charges under the Internal Revenue Code or (ii) promoting, marketing or recommending to another celebration any deal or matter addressed herein.
General Disclosure: This post is intended to offer general details about estate planning methods and must not be relied upon as an alternative for legal advice from a certified attorney.