Comprehensive estate planning requires you to do much more than simply decide who will receive your estate assets when you are gone. If you have a moderate to large estate, one of the most important additional goals of your estate plan should be tax avoidance. If you fail to plan for the impact of federal gift and estate taxes, for example, your estate could lose up to 40 percent of its value to Uncle Sam. The need to incorporate tax avoidance techniques into your estate plan is particularly crucial if you are married to a non-citizen spouse. Only an experienced California estate planning attorney can review your circumstances and advise you how best to reach your tax avoidance goals; however, one common tool used when a taxpayer is married to a non-citizen spouse is a Qualified Domestic Trust, or QDOT.
Multi-National Marriages in the 21st Century
As the world shrinks and national borders blur, it is becoming more and more common for people to enter into relationships with people from other countries. In fact, in 2013 the United States Census Bureau reported that one in five marriages in the U.S. 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. Couples in “mixed-nativity” marriages may face a number of practical issues throughout their marriage as a result of the immigration status of one spouse. If the citizen spouse has a moderate to large estate that he/she wishes to leave to the non-citizen spouse upon death, special care must be taken in how that is done too avoid the loss of a significant percentage of the estate’s value.
Federal Gift and Estate Taxes
If you are a U.S. citizen, your estate will be subject to federal gift and estate taxes when you die at the rate of 40 percent. The gift and estate tax is essentially a tax on the transfer of wealth and applies to the value of all qualified gifts made during your lifetime combined with the value of your estate assets at the time of your death. While there are a number of estate planning strategies that may help you diminish the impact of federal gift and estate taxes, one thing taxpayers have long been able to count on using is the unlimited marital deduction. As the name implies, the unlimited marital deduction allows a taxpayer to gift an unlimited number of assets to a spouse without incurring the federal gift and estate tax; however, the marital deduction does not apply if your spouse is not a U.S. citizen. Therefore, if you directly gift assets to your non-citizen spouse in your estate plan a significant chunk of those assets could be lost to Uncle Sam.
How Can a Qualified Domestic Trust Help?
If you are married to a non-citizen and wish to leave him/her significant assets in your estate plan, a QDOT trust may be the best solution. A QDOT is a specialized trust into which you will transfer your estate assets. Your spouse will be entitled to the interest from the trust assets but will not own the assets. In fact, your spouse will not be entitled to access the principal held in the trust unless he/she can demonstrate a hardship need. The only time your spouse can access the principal is if your spouse can demonstrate an “immediate and substantial” need for money relating to “heath, 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.
If you have additional questions or concerns relating to a Qualified Domestic Trust, contact the experienced California estate planning attorneys at Collins Law Firm by calling (310) 677-9787 to schedule an appointment.