Over the last several decades, however, national borders have all but disappeared, leading to a dramatic increase in cross-border marriages in the United States. In fact, the United States Census Bureau reports that one in five marriages in the U.S. today includes a spouse born outside the U.S. Of those marriages, about 60 percent of the foreign-born spouses have become naturalized citizens, leaving the remaining 40 percent as non-citizens. If you are married to a non-citizen, estate planning takes on a heightened importance. As the Riverside estate planning lawyers at Sandoval Legacy Group, A Professional Law Corporation explain, the inheritance rules are different for your non-citizen spouse.
Understanding Federal Gift and Estate Tax
The federal gift and estate tax is a tax that is imposed on an estate after the death of the estate’s owner. Every estate is potentially subject to the tax; however, every taxpayer is also entitled to make use of the lifetime gift tax exemption before a gift or estate tax is imposed. The lifetime gift and estate tax exemption was set at $5 million by the American Taxpayer Relief Act in 2012. President Trump enacted changes to the exemption amount in 2018 that dramatically increases the exemption amount for several years; however, it will return to the previous amount (adjusted for inflation) in 2026. The portion of an estate tax that exceeds the exemption amount is subject to gift tax or estate tax. If your estate is subject to federal gift and estate tax it can significantly diminish the value of your estate given that the tax rate is currently set at 40 percent.
The Unlimited Marital Deduction and Your Non-Citizen Spouse
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 or 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. The unlimited marital deduction, however, only works as a tax avoidance strategy if your spouse is an American citizen at the time of your death. If your spouse is a non-citizen and your estate is over the exemption amount, another tax-avoidance strategy must be employed. A common alternative is to create a special trust allowed by Congress and the IRS known as a Qualified Domestic Trust (QDOT).
How Can a QDOT Help?
A Qualifying Domestic Trust (QDOT) is a specialized trust that allows you to provide for a non-citizen spouse without the help of the unlimited marital deduction. Your spouse will be entitled to all of the income from the trust assets but will not own the assets nor can your spouse access the principal held by the trust without first paying the estate tax that would have otherwise have been due with the QDOT. Upon the death of your surviving spouse, the assets held in the trust will be distributed to the beneficiaries named in the trust, usually your 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. A QDOT allows you to provide income and access to principal, if needed for your non-citizen spouse without losing up to 40 percent of your excess estate assets in the process.
Contact Riverside Trust Attorneys
If you have additional questions or concerns about how to protect your non-citizen spouse in your estate plan, contact the experienced Riverside estate planning and elder law attorneys at Sandoval Legacy Group, A Professional Law Corporation by calling (951) 888-1460 to schedule an appointment.
Have a question? Ask Dennis.