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What kind of estate planning is recommended for people with a non U.S. citizen spouse? In most cases, the estate of a deceased may be transferred to a U.S. citizen spouse without any inheritance tax, with the exclusion of a large amount to U.S. citizens and permanent resident dead in 2009 and unlimited marital deduction. When the spouse of a deceased is not a U.S. citizen, however, the estate can not claim the marital deduction irrespective of the nationality of the deceased. This is not a problem if adeceased estate is less than the applicable exclusion amount, or if the surviving spouse becomes a U.S. citizen, before filing a declaration of succession. But what if you are a nonresident alien and have an applicable exclusion amount of only $ 60,000? Or, if your spouse has not acquired citizenship in time?
Under code sections IRC 2056 (d) and 2056A, a Qualified Domestic Trust (Qdot) is the only instrument by which the marital deduction may be claimed if the spouse isnot a citizen of the United States at the time of filing an estate tax return. A Qdot allows families with low amount of the exemption or large estate to defer estate tax, provide income to a surviving spouse, and create valuable time during which the surviving spouse may acquire the U.S. citizenship. The IRS allows Qdot because they defer estate tax until the second spouse's death: Report tax reduces the likelihood that the surviving spouse can claim a deduction marital and die in a foreign languagecountries, thus avoiding U.S. tax. In this section, we discuss three reasons why individuals with a spouse not citizen of the United States should consider estate planning with Qdot, and how to avoid many pitfalls.
First reason: Call Qdot individuals with assets in excess of their applicable exclusion amount.
Individuals with a spouse are not citizens of the United States often choose to establish a Qdot to claim the deduction for domestic land are higher than the amount of the applicable exemption.As mentioned above, a Qdot is the only instrument by which the marital deduction may be claimed if the spouse is not a U.S. citizen. For nonresident aliens, permanent residents of the United States and American citizens alike, Qdot planning should be seriously considered in assets above the amount of the applicable exemption will be transferred to non U.S. citizen spouse.
The non-resident aliens with U.S. assets more than $ 60,000. In addition to other strategies, Qdot planning should be seriouslyconsidered by foreign non-residents with assets located in the United States that exceed $ 60,000. Non-resident foreigners can transfer only $ 60,000 in 2009, without raising property tax rate of 45%. With a Qdot, however, the estate tax is deferred until the second spouse's death.
U.S. citizens and permanent residents with spouses non-US Citizen. If a U.S. citizen or permanent resident estate is $ 3.5 million at death in 2009, the total duty-free passage in Mayregardless of the nationality of the spouse. In addition, families with assets over $ 3.5 million should consider using a Qdot with other estate planning strategies to preserve the marital deduction. Families should keep in mind that in 2011 unless Congress acts, the amount of the applicable exemption will be reduced to $ 1 million. If this happens, many families with properties above $ 1 million mai one day benefit planning Qdot. As it stands, however, future changes in the law areuncertain.
Surviving Spouse is a Non-Resident Alien. Another problem arises when a U.S. citizen or permanent resident has an area below the applicable exclusion amount, but when the spouse is a nonresident alien. In such cases, the death of the surviving spouse may incur liability substantial property taxes on his or her death. As mentioned above, non-resident aliens can transfer only $ 60,000 in 2009, without raising property tax rate of 45%. These individuals in Maybenefit of Qdot and estate planning for families of other international.
Second reason: Lifetime Income and Estate Tax Deferral
To see the benefits of income tax deferral, consider the following example. Suppose that Ronald, a permanent resident of the United States, died in 2009, leaving two children and his wife, Mary. Mary is not a U.S. citizen, and Ronald estate amounted to $ 5.5 million. For purposes of this example, we assume that there is no common property.Amount of exclusion Ronald is used to protect 3.5 million worth of property tax, which is transmitted to children through a trust created before the death of Ronald. The remaining passes $ 2 million to Mary as a personal residence of $ 1.5 million in California and $ 500,000 in securities. Ronald has not established a Qdot in his lifetime. Therefore, the 2 million dollars would normally be taxable because it exceeds the exemption amount of Ronald and Mary does not qualify for marriagededuction. However, Mary is working with a lawyer to create a Qdot, which pays interest of 5 percent Unitrust to hold the assets. Marie subsequently transfers the assets to the Qdot before filing the estate tax return. The trustee pays the fair market value rent to live in the residence, and the trustee Marie pays $ 100,000 a year. Marie receives additional distributions of Qdot to pay for the trust, and to provide funding in case of difficulties for her or hischildren.
In the above example, Qdot Marie allows the deferral of estate tax. Because Mary has timely assets transferred to a Qdot, transfer of assets from the estate of Ronald is not subject to estate tax upon the death of Ronald. In fact, in the example above any federal tax was rescinded on first death through the use of proper planning. The estate tax will be deferred until the second spouse dies, a huge benefit for Mary in herlife. However, this does NOT mean that the surviving spouse will be able to offset tax assets Qdot with its exclusion amount applicable at the time of his death. Assuming that Mary never became an American citizen, an inheritance tax will be imposed on assets Qdot by reference to the estate of Ronald. However, it would at least have the advantage of Qdot income during his life.
The third reason has Qdot save time
The Qdot in the above example to save time for Mary to acquire U.S.citizenship. If Mary eventually became a U.S. citizen before his death, the ordinary rules that apply to spouses of U.S. citizenship for the establishment of the marital deduction applies. Consequently, the entire $ 5.5 million can pass to their children without the property tax assessment to the death of Mary. However, Mary must be a resident for the entire period after the death of Ronald order to avoid estate tax deferred. The United States trustee also must timely notify the IRS of the acquisition of Marycitizenship.
During the time it takes Mary to acquire its nationality, may receive certain distributions that are not subject to a tax imposed under IRC Qdot section 2056A (b). First, it may be paid such an amount Unitrust between 3-5 percent. In the example above, Mary and her lawyer have agreed on the maximum percentage of 5%. Mary can not, however, receive capital gain or a capital distribution without tax liability Qdot. Secondly, Mary can receive atax free Qdot principal distribution in case they suffer financial hardship and have no other reasonable source of donor funds for health or that of her children, maintenance and support. Third, Mary can receive distributions of Qdot Qdot tax free to pay certain fees and taxes on profits generated by the Qdot. Finally, after Mary becomes a U.S. citizen, distributions can be made without the imposition of IRC section 2056A (b) tax Qdot.
Consider the manyTraps
Rules. In case of Marie and Ronald, we may glimpse some of the myriad rules governing Qdot. Importantly, at least one trustee must be a U.S. citizen or company, which has the power to withhold the amounts of capital distributions to pay a special tax Qdot.
The Qdot can be created by Ronald before his death, the executor of Ronald, or even Mary herself. In some cases, a Qdot is created by the reforman existing trust or by a court. In these situations, the Qdot should be created before the filing of the estate tax return in order to avoid the imposition of interest and penalties. In addition, under an existing trust must be respected to avoid litigation. Therefore, it is generally easier for the Qdot be established before the death of first spouse.
The Qdot can not make any capital distribution unless there are special deductionsmet in order to pay taxes. In addition, in situations where assets Qdot are important, it is necessary that at least one trustee be a U.S. bank or the U.S. trustee post a substantial bond to the date of death value of assets Qdot. In addition, because Mary may acquire U.S. citizenship when the Qdot is in place, it should be worded so that it can flexibly respond to these changes. This is not an exhaustive list of requirements for a valid Qdot, but some may give youidea of the many rules that must be followed.
What if I die in 2010? The effects of the repeal of property taxes in 2010 on Qdot are mixed. On the one hand, there will be no postponement of the estate tax for surviving spouses die in the year 2010 under IRC section 2210 (b) (2). On the other hand, all distributions from a Qdot year 2010 (with some exceptions) would be subject to tax Qdot as discussed above.
Not a panacea. While a Qdot has several advantages, it should not betreated as a one-size-fits-all solution. Some assets may not be eligible to transfer to a Qdot, and the cost of establishing and maintaining Qdot could be high relative to its benefits. In addition, the requirement of a representative of the United States necessarily involves a loss of control for the non-citizen spouse, and any additional expenditure. Satisfaction early Qdot assets, the amount of final tax payable on the death of second husband, the ability to make tax free distributions undera hardship exemption for the spouse's lifetime, and the probability of acquisition by spouse of U.S. citizenship influence whether a tax deferral under a Qdot worth and cost. In some situations, individuals may consider the payment of a tax on the death of first spouse to outweigh the cost and complexity associated with Qdot.
Individuals and their families should also consider the special rules governing joint ownership of death for individuals with the United Statesspouses of citizens. Under IRC Code Section 2040 (a), a contribution of tracing May rule applies when one spouse is not a U.S. citizen, led to the integration of all common property in the estate's taxable the deceased. In addition, international families still need to take the role of foreign courts in mind. Many civil law countries do not recognize trusts, which may result in adverse tax consequences in a different country. In addition, the benefits of a treaty of inheritance tax could make a Qdotunnecessary.
Conclusion: Consider your options
Qdot are one tool among others that are available to people with spouses of non-US citizens. An appropriate strategy should also consider alternative gifts and testamentary devices. In all cases, the succession plan should be well coordinated with applicable treaties, the rules of the foreign jurisdiction, and estate planning documents already in place. Ideally, the advice and counsel to both foreign and domesticshould be sought.
IRS Circular 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that the tax advice of the United States included in this communication (including attachments) is not intended or written to be used, and can not be used in order to (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
General Disclosure: This article isintended to provide general information on estate planning strategies and should not be relied upon as a substitute for legal advice from a qualified attorney.
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