In our last blog post, we discussed estate taxes, federal gift taxes, and how non-citizen spouses are treated differently in the eyes of the law. Unfortunately, while husbands and wives can leave an unlimited amount of money to their spouse if they are United States citizens (under the unlimited marital deduction rule), non-citizens spouses can only collect $5.34 million in assets from their loved one before being subjected to a 40% estate tax.
Why does this rule exist? Very simply, the federal government does not want large amounts of money leaving the country with a non-resident widow or widower – at least not until this money is taxed first.
Two Strategies for Skipping or Deferring the Estate Tax
If you are planning your estate and realize that your non-citizen spouse may lose considerable funds upon your death because of estate tax laws, there are two strategies that you can take that may help you avoid the issue down the road.
- Take steps toward citizenship. When it comes to the unlimited marital deduction rule, a green card or a visa doesn’t make a difference: your spouse must be an official United States citizen to qualify. Those with green cards are just a few steps away from citizenship, though the naturalization process does take time. Any person who has been married to a citizen for three years and who is living permanently in the United States may apply for citizenship. After filing, the process takes approximately six months. If your spouse has the time and the desire to become a citizen, this is an excellent strategy for avoiding the estate tax.
- Set up a QDOT Trust. If you have a qualified domestic trust (QDOT), your assets will be transferred into the trust instead of to your spouse upon your death. Although your spouse will not be able to access these assets directly, he or she will receive any income that the trust produces over time. The trust must have a U.S. citizen or U.S. bank as a trustee and the trust must not have any beneficiaries besides your spouse. If the trust assets are distributed, they will be subject the federal estate tax unless your spouse has an urgent and immediate need for money.
Both of these strategies take time and effort – and both require planning before one partner passes away. To learn more about how you may be able to avoid a heavy tax on your estate, call The Law Office of Janet L. Brewer today to schedule an appointment and speak with an experienced, knowledgeable estate tax attorney: (650) 325-8276.