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Estate Planning for Non Citizens
When advising clients on estate planning and one spouse or both are not US citizens, there are several important considerations:
Marital Deduction. Property that passes from the decedent spouse to the surviving spouse passes free of federal estate tax. This is called the marital deduction. The amount of the marital deduction is unlimited. It has the effect of postponing the federal estate taxation of property that passes from the decedent spouse to the surviving spouse until the surviving spouse’s death (to the extent that the property is not expended by the surviving spouse during his or her lifetime). However, this estate tax deferral opportunity is somewhat limited when the surviving spouse is not a US citizen.
Qualified Domestic Trust. The marital deduction does not apply when the surviving spouse is not a US citizen, and property passes outright to him or her. It applies only when the property passing to the surviving spouse passes in a qualified domestic trust, or “QDOT”. As a result, a QDOT may serve as an effective tool for estate planning.
General Power of Appointment Marital Trust. In addition to complying with a unique set of rules, a QDOT must be a marital trust that would otherwise qualify for the federal estate tax marital deduction if the surviving spouse were a US citizen. The most common trusts for this purpose are a general power of appointment marital trust, or “GPOA Trust”, and a qualified terminable interest property marital trust, or “QTIP Trust”. In both of these trusts, the remaining trust assets are included in the surviving spouse’s estate upon his or her death, thereby postponing the federal estate taxation until the death of the surviving spouse.
A GPOA Trust is created for the sole benefit of the surviving spouse during his or her lifetime. Its terms provide the surviving spouse with an income interest for life. The surviving spouse is granted a broad power to direct the distribution of assets remaining in the trust at his or her death; this power is known as a general power of appointment.
Qualified Terminable Interest Property Marital Trust (QTIP). Like a GPOA Trust, a QTIP Trust provides the surviving spouse with an income interest for life. However, the surviving spouse will not have the power to direct the distribution of the remaining trust assets at his or her death. Instead, the remaining trust assets will be distributed in accordance with, and to the beneficiaries named in the trust instrument. The decedent spouse, as the trust creator, controls the disposition of the remaining trust assets at the death of the surviving spouse.
Requirements for Marital Deduction. A GPOA Trust or QTIP Trust for the benefit of a surviving non-citizen spouse will not qualify for the marital deduction unless it also meets certain requirements that qualify it as a QDOT. These requirements help ensure that the US will be able to collect estate taxes during the surviving spouse’s lifetime if principal distributions are made to the surviving spouse and upon the surviving spouse’s death or disqualification of the trust as a QDOT. A fundamental QDOT requirement is that at least one trustee be a US trustee. A US trustee is an individual who is a US citizen or a domestic corporation. A domestic corporation is a corporation organized under the law of any state or the District of Columbia. Therefore, the surviving non-citizen spouse may be a trustee as long as a US trustee is serving with him or her. If the value of the QDOT assets exceeds $2 million (not including a personal residence with a value of up to $600,000), a QDOT trustee must be a US bank unless the US trustee meets a certain bond requirement (65% of the trust's value.)
Estate planning for non-citizens spouses is complicated and the rules governing these types of trusts are complex. Your Ingalls advisor in conjunction with your attorney and tax advisor can guide you through this process.
The material is not to be reproduced or distributed to others without Ingalls & Snyder, LLC’s (“Ingalls” or the “Firm”) express written consent. This material is being provided for informational purposes and any opinions expressed in this material are only opinions at the time of writing. Nothing provided by Ingalls should be considered tax or legal advice, and clients should seek advice from their tax and legal professionals. Bridgehampton is a team at Ingalls & Snyder, LLC, an investment advisor registered with the Securities & Exchange Commission and a FINRA member broker dealer. More information including the firm’s Form ADV Brochure and Form CRS can be found at https://www.ingalls.net/importantinformation
The content provided herein is for informational purposes only. The statements are believed to be accurate at the time of writing, but tax laws may change. The statements provided do not contemplate each individuals unique financial circumstances. Therefore, you should consult a professional legal and tax advisor for your estate planning needs before taking action.
Ingalls & Snyder is a registered investment advisor and broker-dealer based in New York City. We provide investment management and related services to private clients and institutional investors.
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