If you are married to someone who was born in another country and remains a non-citizen, careful estate planning takes on heightened importance. Not all that long ago, your marriage would have been somewhat unusual; however, as the world continues to shrink, multi-national marriages are becoming more common. In fact, one in five marriages in the U.S. today includes a spouse born outside the U.S., according to the U.S. Census Bureau. Of those marriages, 40 percent of the foreign-born spouses remain non-citizens. The Oklahoma City estate planning attorneys at Parman & Easterday explain how to protect your non-citizen spouse in your estate plan.
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 exemption before the tax is imposed. Over the last 20 years, the unified lifetime estate and gift tax exemption has risen dramatically, from $600,000 to $5 million (adjusted annually for inflation) as set by the American Taxpayer Relief Act of 2012 (ATRA). Legislation signed by President Trump increased the unified lifetime exemption in 2018 even further to more than $11 million per person for several years; however, new legislation stipulates that the exemption amount will return to the previous amount (adjusted for inflation) in 2026. The portion of an estate’s net value that exceeds the exemption amount is subject to 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 was also permanently set at 40 percent as part of ATRA.
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/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. This defers any estate tax liability to the second death at which time those assets will eventually be included in the surviving spouse’s estate and taxed at the time of his/her death. The unlimited marital deduction, however, only works as a tax deferral strategy if your spouse is an American citizen at the time of your death. If your spouse is a non-citizen, another tax-deferral strategy must be employed. A common alternative is to create 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 the income from the trust assets but will not own the assets; 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 “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. A QDOT allows you to maintain a strategy of deferring estate taxes until the second death, just as the unlimited marital deduction provides for citizen spouses. By utilizing a QDOT you can protect your non-citizen spouse without losing up to 40 percent of your estate assets at the time of the first death.
Contact Oklahoma City Estate Planning Attorneys
For additional information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about how to protect your non-citizen spouse in your estate plan, contact the experienced Oklahoma City estate planning attorneys at Parman & Easterday by calling 405-843-6100 to schedule your appointment today.