As the world becomes more global, countries and cultures mix and intermingle more. This has led to more and more “international” marriages in the United States in recent decades. It isn’t uncommon these days to have a neighbor whose wife/husband is from another country. Sometimes, the foreign born spouse will eventually become a U.S. citizen; however, not all choose to renounce their citizenship or apply for dual citizenship. If your spouse is not a U.S. citizen it can create some potential issues when it comes time to create your estate plan because the unlimited marital deduction that many couples rely on doesn’t apply when your spouse is a non-citizen. A QDOT trust, however, may be the answer.
When you die your estate assets are potentially subject to gift and estate taxes if the value of your assets combined with lifetime gifts exceeds the lifetime exemption limit, set at $5.34 million for 2014. Married couples, however, are able to pass on an entire estate tax-free by using the unlimited marital deduction. The problem, though, is that the unlimited marital deduction is only available if your spouse is an American citizen. If your spouse never applied for American citizenship, any assets you leave your spouse are subject to taxation. At a tax rate of 40 percent your estate can lose substantial assets that were intended to be used to support your spouse after your death. A QDOT trust solves this dilemma by placing the assets in a trust that provides for your spouse.
A QDOT trust operates much like any other trust. After creating the trust you transfer assets into the trust. Interest earned on the assets is then disbursed to your spouse for his/her lifetime. Upon the death of the surviving spouse the principal of the trust is disbursed to beneficiaries, often children, and any gift and estate taxes paid at that time. As a general rule, the non-citizen spouse cannot touch the trust principal; however, here is a hardship exemption that allows access to the trust principal if your spouse has an “immediate and substantial” need for money relating to “heath, maintenance, education or support”.
Certain rules apply to a QDOT that don’t apply to other trusts. For example, the trustee of the trust must be a U.S. citizen and trusts that hold over a certain amount in assets must be administered by a U.S. bank as the trustee. Because the rules for a QDOT are complex, be sure to discuss creating one with your estate planning attorney if you ae concerned about protecting a spouse who is not a U.S. citizen.
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