Mixed-Nativity Marriages in the U.S.
American has long been referred to as a melting pot, and with good reason. According to the U.S. Census Bureau, 11.4 million married-couple households, or 21 percent of all married-couple households in America in 2011, had at least one spouse born in another country. About 13 percent (7.3 million) of households had two foreign-born spouses, and 7 percent (4.1 million) had one native-born and one foreign-born spouse. Of the couples with one native-born spouse, 61 percent of the native-born spouses were naturalized U.S. citizens, leaving 20 percent as non-citizens. That means that at the time these statistics were gathered, there were almost 1.6 million married couples in the U.S. wherein one spouse was a non-citizen.
Estate Planning Considerations for the Non-Citizen Spouse
Why does it matter if your spouse is a non-citizen? After all, you can gift assets to anyone you want, without regard to their citizenship status, right? While that is, indeed, true, there are ancillary considerations that potentially make gifting a non-citizen spouse problematic. Specifically, the U.S. tax laws can create a problem when you fail to take your spouse’s citizenship status into account when creating your estate plan.
In the normal course of events, you may plan to leave your entire estate to your spouse when you die, counting on your spouse to then pass down whatever remains of your combined assets to your children upon his/her death. You can normally do this without worrying about federal gift and estate taxes because of the unlimited marital deduction. The unlimited marital deduction allows a spouse to gift an unlimited amount of assets to a surviving spouse tax-free. The theory behind the deduction is that those assets will eventually be taxed when the surviving spouse passes away in the future.
The problem, however, is that the unlimited marital deduction is not available to a non-citizen. The rationale behind excluding non-citizens from the deduction is the fear that a non-citizen could easily leave the country, taking the assets with him/her, without Uncle Sam getting the tax due on the transfer of wealth. Once the assets leave the country, they are out of reach of the U.S. tax authorities. By excluding non-citizens from using the marital deduction, assets remain subject to taxation at the time they are gifted, just as they would be if gifted to anyone other than a spouse. The federal gift and estate tax levies a 40 percent tax on the value of lifetime gifts coupled with the value of assets owned by a taxpayer at the time of death beyond the current lifetime exemption limit. If the marital deduction is not available, your estate could incur a significant tax obligation if you failed to plan ahead.
Is a QDOT Trust the Answer?
One popular solution to the non-citizen spouse dilemma is to create a Qualified Domestic Trust (QDOT) and transfer assets intended to help provide for your non-citizen spouse into the trust. Your spouse will be entitled to the interest from the trust assets but will not own the assets outright but held in the QDOT. Your spouse can receive principal from the QDOT as needed the “health, 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. Using a QDOT allows you to provide for your non-citizen spouse without potentially losing a significant portion of your assets to gift and estate taxes.
Contact Somerset Trust Attorneys
For more information, please download our FREE estate planning worksheet. If you have additional questions or concerns about how to protect your non-citizen spouse, contact the experienced Somerset trust attorneys at Augulis Law Firm by calling 908-222-8803 to schedule your appointment today.