You should inventory your assets when you are planning your estate for a number of different reasons. Clearly, you want to take stock of your resources when you are thinking about how you want them to be transferred after your passing.
In addition to this general inventory, you should estimate the total value of your estate so that you can evaluate your position relative to the estate tax exclusion.
The federal estate tax can heavily impact your family’s future if you are exposed. This tax carries a 40 percent maximum rate, so we are talking about a great deal of asset erosion.
For the rest of 2014, the federal estate tax exclusion is $5.34 million. Each year there are adjustments to account for inflation. In 2015, the exclusion will be adjusted upward to $5.43 million.
This exclusion is only applicable on asset transfers to people other than your spouse. There is an unlimited marital deduction that allows you to leave any amount of money and/or property to your spouse tax-free.
However, there is a caveat: To use the unlimited marital deduction, you must be married to a citizen of the United States. This exclusion is not available to non-citizen spouses.
The government does not want a citizen of another country to go back to his or her country of citizenship with a tax-free inheritance, and this is why this stipulation is in place.
QDOT Trusts
If you are married to a citizen of another country, you could provide for your spouse through the utilization of a QDOT trust. This acronym stands for a qualified domestic trust.
You fund the trust, and your spouse would be the initial beneficiary. Assuming you do predecease your spouse, your surviving spouse could receive income from the trust’s earnings throughout his or her life. The estate tax would not be applicable, so the earning power of the entirety of the trust’s assets would remain intact.
Depending on the nature of the trust agreement, the trustee could be empowered to distribute part of the principal, but these distributions would be subject to the estate tax unless there was a hardship exemption granted by the IRS.
You would name a successor beneficiary in the trust agreement, and this beneficiary would assume ownership of the assets in the trust after the death of your spouse. This transfer would be subject to the estate tax, but a lot of money could be saved during the life of the surviving spouse.
Free Consultation
A QDOT trust can provide a solution for high net worth people who are married to foreign citizens. If you would like to learn more about QDOT trusts or any other estate tax efficiency tool, contact us through this page to set up a free consultation: Southampton PA Estate Planning Attorneys.
Joe Masiuk, Estate Planning Attorney
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