Regardless of whether you and your spouse are U.S. citizens, you should set up an estate plan, which consists of an Trust, Advance Health Care Directive, Financial Power of Attorney, and Will. Non-citizens can inherit property from a U.S. citizen, but if your spouse is not a citizen your estate plan must be carefully drafted.
Only the estates of individuals who leave a gross estate of more than $5.49 million are potentially subject to estate tax (in 2017, but this is adjusted upward for inflation every year). This exemption amount for a married individual is transferable to a U.S. citizen spouse, but not a non-citizen (even if the spouse is a permanent U.S. resident). The federal government doesn’t want someone who is not a U.S. citizen to inherit a large amount of money, pay no estate tax, and then leave the country when the government has no legal authority over that individual to collect taxes owed. If the non-citizen spouse dies first, assets left to the surviving U.S. citizen spouse do qualify for this unlimited marital deduction ($5.49 million estate tax exemption).
A Qualified Domestic Trust (QDOT) defers federal estate tax when a U.S. citizen dies and leaves a large amount of money to a non-citizen spouse. With a QDOT, if the first spouse to pass is the U.S. citizen, assets are transferred to the QDOT instead of directly to the surviving non-citizen spouse. The surviving spouse can receive the trust assets from the trustee of the QDOT, but doesn’t own them. When the second spouse dies, assets pass to the beneficiaries named in the Trust. If the estate is valuable enough, estate tax is paid after the death of the second spouse.
Many IRS rules must be followed when the QDOT is set up. For example, the trustee must be a U.S. citizen. If the value of trust assets exceeds $2 million, one of the trustees must be a U.S. bank (with limited exceptions). And after the first spouse dies, a federal estate tax return must be filed with the IRS and a QDOT tax election must be made within nine months after death.
If the trustee gives the surviving spouse any of the trust principal of the QDOT, estate tax may be due. No estate tax will be due, however, if money is distributed in circumstances that fall under the IRS hardship exemption. If the spouse has an “immediate and substantial” need for money relating to “heath, maintenance, education or support” a distribution of trust funds may qualify for a hardship exemption if the surviving spouse doesn’t have other reasonably available liquid assets. Interest from assets subject to the QDOT will be subject to income tax.
Creating a QDOT involves potentially millions of dollars and complicated IRS rules. You should consult with an expert about the setting up this kind of Trust. There are also various immigration issues that may arise, so you should also consult with an immigration attorney.
Disclaimer: This material was prepared for general informational purposes only, and is not intended to create an attorney-client relationship and does not constitute legal advice. This material should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction.