California Probate - Law Offices of Janet Brewer Blog

Should You Leave Your Investment Real Estate to Your Spouse?

Without a little advance knowledge, leaving your investment real estate to your spouse could create problems later on. There are two primary issues that might arise, depending on your circumstances: (1) exceeding the estate tax exemption, and (2) burdening a non-citizen spouse with a tax bill.

Exceeding the Estate Tax Exemption

In the United States, the estates of deceased people must pay taxes on the total value of the estate if it exceeds a certain amount. An estate also may owe taxes if the deceased person made a number of large lifetime gifts. Until 2026, the estate and gift tax exemptions are $11.18 million for an individual and $22.36 million for a couple – as long as you and your spouse are U.S. citizens or permanent residents (see below). This means that if you have a combination of lifetime gifts and total estate value on death that do not exceed $11.18 million, you will not owe estate taxes.

If you own investment real estate that you plan to leave to your spouse, the real estate’s value could take you over the exemption limit. Especially in California’s hot property markets, a building could spike in assessed value. This will leave your estate paying thousands of dollars in taxes, money that could have gone to your spouse. You have a few options to avoid getting in this situation, such as leaving the real estate to a trust or making sure your estate administrator elects estate tax portability for your spouse. Unfortunately, if your spouse is not a U.S. citizen or resident, you cannot use estate tax portability or the marital exemption.

Non-Citizen Spouses and Taxes

The U.S. government requires non-U.S. citizen, non-resident spouses to pay considerably higher estate tax rates than citizens and permanent residents. If you leave your investment real estate to your spouse, he or she may have to deal with (1) estate taxes on the property after you pass away, and (2) increased value to his or her estate because of the valuable property. Your spouse could face increased income taxes because of his or her citizenship status if the property is rented out to tenants. If the real estate is outside California, your spouse may face an inheritance tax.

Many of these possible tax problems for non-U.S. citizen, non-residents can be resolved with careful advance planning. For example, you could create a qualified domestic trust (QDOT) and make the investment property a trust asset. Consult a lawyer for advice on how to proceed.

Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.

What Is a Qualified Domestic Trust in California?

For spouses with international backgrounds, qualified domestic trusts (QDOTs) may help with estate and tax planning for their futures. QDOTs are a great tool for a United States citizen to protect assets for a spouse who is not a U.S. citizen.

A qualified domestic trust is a special kind of trust with special rules about trustees and distributions. In exchange for following these rules, spouses get protection from paying estate and gift taxes that the government would otherwise require.

Special Rules for QDOTs

QDOTs work like traditional trusts in that they have one or more trustees, property that is transferred by an individual into trust, and a beneficiary (who is often the non-citizen spouse). Unlike a traditional trust, a qualified domestic trust must have at least one trustee that is a U.S. citizen, a U.S.-based bank, or a trust company formed in the U.S. If the QDOT holds more than $2 million in assets, it must have a domestic bank as one of its trustees.

The trustee(s) of a QDOT must approve all principal distributions, meaning distributions to the beneficiary of assets that were originally contributed by the U.S. citizen spouse who formed the trust. If a principal distribution is made, it will be subject to federal estate taxes. The only exception is in cases of exceptional hardship when the non-citizen spouse needs money in an emergency. However, if a distribution of interest is made from a QDOT, the non-citizen spouse only has to pay regular income taxes on it.

Protections Offered by QDOTs

QDOTs can protect non-citizen spouses from paying large amounts of estate taxes when their U.S. citizen spouses pass away. They are useful primarily for international couples who have assets exceeding $11.18 million, because that is the current estate tax exemption for an individual citizen.

When one spouse is not a citizen, the couple cannot take advantage of the marital deduction. This tax deduction allows spouses to transfer assets to each other tax-free. If the citizen spouse dies and the other spouse does not become a citizen by the time the deceased spouse’s estate tax return is filed, he or she cannot receive the marital deduction. This will mean an expensive tax bill, either on the deceased spouse’s estate or for the non-citizen who receives assets in the spouse’s will or during his or her lifetime. The QDOT works around this problem by holding all or a portion of the estate in trust for the non-citizen.

Do you have more questions about forming a qualified domestic trust as part of your estate plan? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.

Who Can Benefit From International Estate Planning?

There are a number of common misconceptions regarding international estate planning and international tax law – and each year these misconceptions lead to families finding themselves facing tax problems, financial losses, guardianship issues, and other serious problems. Many of these issues can be avoided altogether with forward-thinking international estate planning.

Who should consider finding an attorney who has experience with international estate planning? It is not, as many people think, only those who have dual citizenship or those who are married to a non-citizen. It is for anyone who might have interests, assets, or loved ones living abroad, or for anyone who is living abroad in the United States. You may benefit from the services of an international estate planner if:

• You are a United States citizen who owns significant assets and property abroad.
• You are a United States citizen married to a non-citizen of the United States.
• You are a non-citizen of the United States married to a citizen or with significant assets and property in the U.S.
• You are a U.S. visa holder in the process of securing a green card.
• You are a United States citizen living abroad permanently or who spends significant time at an overseas residence.
• You are a United States resident who wishes to name an international guardian for your children.
• You are unsure in which country your “domicile” is legally located.
• You are concerned that your international property may be subject to double taxation.
• You are concerned that your overseas assets or property may be subject to forced heirship laws or mandatory inheritance laws.
• You are not sure how a United States estate tax treaty will affect your international estate plan.
• You believe you need assistance with setting up a qualified domestic trust (QDOT).

Remember: even if you are not sure whether you need an estate planner with international experience, speaking with one of our attorneys can help you confirm the answer and make certain your estate is in proper order.

Do you have a question about international estate taxes, estate tax law for non-citizens, or international guardianship law? Would you like to make certain that your wealth is distributed properly and quickly in the event of your death? Would you like to ensure that your children are cared for by the correct legal guardian if something happens to you? At the Law Office of Janet Brewer, we can help you with all of these needs. To get your questions answered, to speak to a California estate planner, or to schedule an appointment, please call (650) 325-8276.

photo credit: sarah sosiak via photopin cc

Qualified Domestic Trust (QDOT) Frequently Asked Questions

When an international couple comes into our office to plan their estate, they often have a lot of questions about qualified domestic trusts (QDOTs) – especially if they own a significant amount of property or assets. Below, we’ve shared the answers to the most common questions we answer during estate planning consultations in which one member of a couple is a non-U.S. citizen.

What is a QDOT?

A Qualified domestic trust is a very specific type of trust that may be created in the instance that a U. S. citizen would like to protect his or her assets from estate and gift taxes for a spouse, in the event of his or her death.

Who benefits from creating a QDOT?

QDOTs are ideal for international couples that have more than $5 million in assets. You do not need to create a QDOT if you and your spouse are both American citizens or if you and your non-U.S. citizen spouse do not have enough assets to be affected by federal estate taxes.

Do QDOTs have any rules or regulations?

Yes. QDOTs have a number of rules designed to keep large sums of money and property from someone who is not a citizen – at least before that money and property is taxed. For example, a QDOT must have at least one trustee that is a United States citizen, a domestic bank, or a domestic trust company. If the QDOT is worth more than $2 million, it must have a domestic bank for a trustee. In addition, the trustee must approve all principal distributions.

Can a spouse receive principal distributions from his or her QDOT?

Unfortunately, unlike many other marital trusts, a spouse cannot receive a principal distribution from the trust without having the money subjected to federal estate taxes. However, a spouse can receive interest distributions without having the money taxed (besides regular income taxes). One rare exception is if the spouse is undergoing a hardship and needs funds for a financial or medical emergency.

Can’t I just transfer money to my spouse before my death?

Unfortunately, because your spouse is not a United States citizen, any transfers over a certain amount is subject to a gift tax. If your spouse was a citizen, he or she could accept an unlimited amount of assets before your death.

Can we avoid creating a QDOT and still avoid the estate tax?

One alternative to creating a QDOT is to have the non-U.S. citizen spouse become a citizen. If this is possible, if you have the time to do so, and if your spouse wishes to become a citizen, this solution could well be preferable to the QDOT solution: when you are both citizens, you will receive an unlimited marital deduction: you will be able to transfer any amount of property and any assets between spouses, during your lifetime or in the event of a death, without being subject to gift taxes or estate taxes.

I still have questions about QDOT – what do I do?

To get all of your questions answered, and to ask questions about your personal situation, call The Law Office of Janet Brewer and request a consultation today: (650) 325-8276. We are dedicated to helping international couples plan their estates and plan their future.

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International Estate Planning Decisions: Create a QDOT or Get Citizenship?

If you are married to a non-U.S. Citizen, estate planning in California is going to be more complex for you than it is for other couples, especially if you have a significant amount of property and assets. However, you do have two major options when it comes to preserving your wealth and making sure your spouse is well-supported even after your death: you can either create a Qualified Domestic Trust (QDOT) or have your spouse take the necessary steps to become a citizen of the United States. There are pros and cons to both choices. Let’s take a closer look.

The Benefits and Drawbacks to Creating a Qualified Domestic Trust

A QDOT is a trust that defers the federal estate tax after one spouse dies and ensure that even a non-U.S. citizen can inherit your assets following your death. This method is a good solution for couples who would be heavily penalized by the estate tax as well as couples in which one spouse does not wish to become a United States citizen for personal reasons (or cannot become a citizen for some reason). This method is also ideal because, while attaining citizenship can take years, a QDOT can be set up in much less time.

However, there are some drawbacks to a QDOT. First and foremost, your inheritance won’t be readily available to your spouse upon your death. Although your spouse can benefit from the trust, for example, by collecting interest accrued by the trust, your spouse does not have direct access to the funds. In addition, any interest earned by the trust is subject to income tax. Any funds taken directly from the trust are subject to estate taxes.

The Benefits and Drawbacks to Gaining United States Citizenship  

The second way that international couples can avoid estate taxes when one spouse dies is simply by having the non-U.S. citizen gain citizenship. When both spouses are United States citizens, they benefit from unlimited marital deduction: a rule that states that you can transfer an unlimited amount of assets and wealth to your spouse upon your death without facing an estate tax or gift tax. Taking advantage of unlimited marital deduction means not having to follow the strict rules associated with QDOTs. It also means that your spouse can freely access your assets after your death.

On the other hand, seeking out United States citizenship might not be an ideal solution for all international couples. First, the citizenship process can take years and involves a considerable amount of time and effort. Secondly, some people may not wish to become citizens, especially if they are from countries that do not allow dual citizenship. Thirdly, some non-citizens may not be able to become citizens for one reason or another.

Palo Alto estate planning for international couples

The Law Office of Janet Brewer is available to help you with your international estate planning, from making sure that your assets are protected from estate taxes when possible, to ensuring that your non-citizen spouse is cared for after your passing. To learn more about our legal services, or to request a consultation, call us today: (650) 325-8276.

photo credit: sarah sosiak via photopin cc

How to Avoid Estate Taxes if You Have a Non-Citizen Spouse

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.

What are the new estate planning rules after our fall off the fiscal cliff?

Now that the fiscal cliff nightmare has passed, many families are wondering how the whole debacle finally shook out. Did Congress actually avert a crisis or does the deal spell doom for those with a sizable estate?

The New Rules for 2013

Under the American Taxpayer Relief Tax Act Of 2012, which Congress passed shortly after midnight on January 1, 2013, an individual may now protect up to $5.25 million from federal estate and gift taxes. Couples are thus able to shield $10.5 million combined. This actually is good news for families facing possible estate taxes as the regulations in place just last year only exempted $5.12 million per person ($10.24 million per couple). Any amount over that exemption will be taxed at 40% - an increase from last year’s 35% rate - but much less than some expected…. and since the exemption will also be adjusted for inflation, the amount shielded from taxes will rise in the coming years. Without any action, the exemption would have fallen to $1 million and the tax rate would have increased to 55%.

No Change to Marital Deduction

The newly enacted law thankfully does not change the marital deduction that was already in place. This means that there is an unlimited deduction from both estate and gift taxes that postpones the tax on assets inherited from a spouse until the remaining spouse dies. One important caveat: the marital deduction only applies if the inheriting spouse is a U.S. citizen unless a special type of marital trust - called a “Qualified Domestic Trust” or “QDOT” is established.

Portability Explained

So under the new law, the amount of money that the surviving spouse can pass along includes their personal exemption of $5.25 million along with the unused exemption of their deceased spouse. This is known as “portability.” It is a concept that has been extended and made permanent in the recently implemented legislation.

It’s important to note that this portability does not happen automatically. Instead, the person handling the estate of the spouse who died first will need to transfer any unused exemption to the surviving spouse. The survivor will then be able to use it to make gifts or pass assets through his or her estate. For this to happen, though, an estate tax return must be filed within nine months of when the first spouse dies, even if no estate tax is owed. If the executor fails to file the return or misses the deadline, then the first spouse’s exemption is lost forever.

Get Help

Whether you have few assets or a multi-million dollar estate, you must have an effective estate plan that works for your family.  As a certified estate planning, trusts, and probate law specialist (certified by the California State Bar Board of Legal Specialization), I have the skills and knowledge to handle complex estate planning matters.  To schedule a consultation to discuss your estate planning goals and needs, please contact us. 

Source:“After The Fiscal Cliff Deal: Estate And Gift Tax Explained,” by Deborah Jacobs, published at Forbes.com.

Minimize Gift Tax When Transferring Money to Loved Ones in the U.S.

Q: What is the best way for my parents in China to give me money for buying a house in the United States?

My parents in China are ready to transfer $20,000 to me as a gift because my boyfriend and I plan to buy a house together. So far though, I'm just in the U.S. on a visitor's visa. How should I handle this to minimize tax on the gift? Should I ask them to transfer it into my boyfriend's bank account?

A: Having your parents transfer $20,000 to a bank account inside the U.S. is not necessarily a good idea from a gift tax standpoint. If you are here in the US on a visa (rather than a green card), it might be a better idea for them to transfer the money to you in China (for example, to your bank account in China, assuming you have one). That way the entire gift takes place "offshore", and would not be subject to US gift taxes.

Examples

Here is a sketch of three possible scenarios:

• Scenario 1: Having your parents make one $20,000 transfer to a bank account inside the U.S. -- since gift tax limit is $13,000, your parents would owe gift tax on the remaining $7,000.  They would need to file a gift tax return (Form 709) and if the cumulative amount of the gifts exceeded $60,000 then they would have to write a check to the IRS.
• Scenario 2: Having each of your parents transfer $10,000 to a bank account inside the U.S. -- since each transfer is under the $13,000 limit, your parents would not owe gift tax.
• Scenario 3: Having your parents make the transfer to your bank account in China -- there is no limit on the transfer amount, but you may have to report the existence of the account under the "FBAR" rules if you are required to file a US income tax return

An FBAR is a Report of Foreign Bank and Financial Accounts. U.S. tax law requires that this report be filed by "any United States person who has a financial interest in or signature authority or other authority over any financial account in a foreign country, if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year."

Even though your parents are non-resident aliens for US tax purposes, if they make the gift in the U.S. (by depositing it to a U.S. bank, for example) they are subject to the $13,000 annual gift tax exclusion -- they would also have to pay gift tax on the difference.  Therefore, another suggestion would be for your father to gift $10,000 to you and then for your mother to separately gift $10,000 to you. That way, each gift would qualify for the gift tax exclusion under US laws.

New Guide: Buying U.S. Real Estate When Your Child Studies in America

International Estate Planning and Structuring Real Estate Ownership

Risks and Rewards of Buying U.S. Real Estate as a Non Resident Alien

The Sasakis Learn Risks of Online Legal Forms: An International Estate Planning Example

The Sasakis Learn Risks of Online Legal Forms: An International Estate Planning Example

This fictional example is drawn from our guide Buying U.S. Real Estate When Your Child Studies in America.

Hiro Sasaki, 19, will be a freshman at Stanford this fall (Class of 2015). Hiro’s parents, Emiko and Dai Sasaki of Tokyo, are looking to purchase a place for Hiro to live. They want to do everything they can to help him succeed, and that means providing a study environment free of the distractions common in a dormitory.

$675,000 cash for Palo Alto townhouse

The Sasakis identify a townhouse in Palo Alto listed for $675,000. It’s close enough for Hiro to bike to campus. Dai pays the listing price in cash, putting the title in his name.

Dai reads online about the importance of having a revocable living trust in the U.S. Dai has seen those online legal programs where it is possible to purchase do-it-yourself-forms. To Dai it seems like a good option. He uses a do-it-yourself form to establish the trust.

Establishing trust does not lower Sasakis' tax liability

Unfortunately, while a revocable living trust is useful for avoiding probate, it does not lower his tax liability. Dai still has only a $60,000 exemption. So if something happened to Dai, his family will have a massive estate tax bill – in the neighborhood of $142,800.

The online legal program where Dai purchased his form wouldn’t “know” about the unique circumstances he is in. And despite diligently completing the form he downloaded, he is about where he started off with respect to his tax liability. 

A minor car accident in Tokyo gets Dai thinking again. He realizes he has not protected his loved ones from a big tax bill, should anything happen. He finds a Bay Area attorney experienced in international estate planning, and gets a sound plan in place. 

Takeaway

This example is made up, but it's true that a stack of forms can’t “know” the nuances of your situation. If your situation is anything like the one described here, consider working with an attorney experienced in international estate planning to craft a plan that fits your unique circumstances.