If you are married, you undoubtedly wish to protect, and provide for, your spouse in your estate plan. To do that, you also need to ensure that your estate assets are protected within your estate plan first. Specifically, you need to be aware of the impact federal gift and estate taxes could have on your estate if you fail to include tax avoidance strategies and tools in your comprehensive estate plan. Protecting and providing for your spouse within your estate plan becomes a bit more complicated when your spouse is a non-citizen. One tool people often use in this situation is a Qualified Domestic Trust, or QDOT. If you are married to a non-citizen spouse, you should find the information provided by the Lincolnshire asset protection attorneys at Hedeker Law Ltd. regarding QDOTs very helpful.
In the 21st century, it is becoming more and more common for people to live, work, and even marry outside of their birth country. 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. As the U.S. rapidly turns into the melting pot it has always claimed to be, “mixed” marriages are no longer nearly as controversial as they once were. They can, however, create some practical issues, particularly where estate planning is concerned.
Federal Gift and Estate Tax
The federal gift and estate tax is essentially a tax on the transfer of wealth in the U.S. Every estate is potentially subject to the tax. The tax is levied on the combined value of all qualifying lifetime gifts and the value of all assets owned at the time of death and is set at the rate of 40 percent. Any gift and estate tax due must be collected from the taxpayer’s estate during the probate of the estate.
The Unlimited Marital Deduction
Although not the best way to avoid paying federal gift and estate taxes, one fallback option has always been to leave your entire estate to your spouse using the unlimited marital deduction. As the name implies, the unlimited marital deduction allows you to leave an unlimited amount of assets to a spouse tax-free. Unfortunately, the deduction is not available, however, if your spouse is a non-citizen. The reason behind this is simple. The unlimited marital deduction sounds great; however, all it usually does is delay the payment of gift and estate taxes. Ultimately, the surviving spouse ends up payment the tax debt when he/she dies. If the surviving spouse is a non-citizen though, there is a very high probability that the assets will be moved out of the country prior to his/her death and Uncle Sam will not receive anything. To protect against this happening, the deduction cannot be used if your spouse is a non-citizen. Consequently, if you fail to plan ahead your spouse could end up with significantly less of your assets than you anticipated after Uncle Sam gets his 40 percent.
How Can a QDOT Help?
A QDOT provides a solution to the problem created by the exception to the unlimited marital deduction. With a QDOT, you are able to transfer all assets intended for your spouse’s benefit into the trust and your spouse will be entitled to the interest from those assets but will not own the assets. 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.
Contact Lincolnshire Asset Protection Attorneys
For more information, please download out FREE estate planning worksheet. If you have additional questions or concerns regarding a QDOT trust, or asset protection planning, contact the experienced Lincolnshire asset protection attorneys at Hedeker Law, Ltd. by calling (847) 913-5415 to schedule an appointment.