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Inheritance and Non-Citizen Spouse
Old 08-20-2007, 04:22 PM   #1
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Inheritance and Non-Citizen Spouse

A friend keeps hearing how smart you guys are, so he asked me to post this:

His wife is a Danish citizen, and wants to remain so, because it will give the kids the option of choosing Danish citizenship (or being dual?). She herself cannot have dual citizenship (my DW does, since Sweden allows it).

He's concerned about the inheritance ramifications. Apparently there's lots of taxation on the inheritance if he were to die first. According to him, the million dollar house could be taxed at 55%, payable even before it is sold.

He's considering a living trust to get around this.

Anyone have any thoughts on this situation?


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Old 08-20-2007, 05:51 PM   #2
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This question came up some time ago. The thread "QDOT and living trust" - sorry I don't know how to do a link to it, do a search - covers the points.

Although the unlimited marital deduction does not apply when the spouse is a non-citizen, the $2m exempt amount can be passed to the non-citizen spouse free of federal estate tax. So unless your friend's assets are above $2m it is a non-issue.

Federal estate tax rates are now 45% (ok, still not good, but better than the previous levels of 55%)

There may be state estate taxes to consider depending on where he lives.

Hope this helps....


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Non-Citizen Spouse
Old 08-20-2007, 10:36 PM   #3
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Non-Citizen Spouse

A Living Trust in and of itself achieves no tax benefits. A US citizen can leave an unlimted amount to a US citizen spouse without the imposition of US estate taxes. If the spouse is a non-US citizen US estate taxes would apply as if the beneficiary was anyone else (other than a US citizen spouse), i.e. the deceased person could leave $2 million tax free (federal, not necessarily true for many states). If the US citizen spouse leaves the assets for the benefit of the non-citizen spouse in a QDT (qualified domestic trust) for the benefit of the non-citizen spouse, the estate taxes on the principal (not any later earned income) are deferred until withdrawn by the non-citizen spouse (for other than hardship) or the non-citizen spouse becomes as US citizen. (income is not subject to estate taxes.) The QDT can even be established after the death of the US citizen spouse if proper procedures are employed.

Amounts left to a US citizen spouse are really tax-deferred as well -- that's why leaving everything to the US citizen spouse is called the tax trap for the unwary -- because if the inheritance isn't spent during the surviving spouse's lifetime, you just over-fund the estate of the surviving spouse, resulting in greater estate taxes at the death of the surviving spouse.

Final result -- with proper planning, estate taxes can be deferred at the death of the US citizen spouse, for the benefit of the non-citizen spouse. (And by the way, this makes sense because otherwise the fear of Congress is that the non-citizen spouse would return to their country of origin resulting in the inheritance from the US citizen being removed from the US estate tax system, something that a couple of US citizen spouses cannot achieve.)

--yes, I am a tax lawyer but this is not tax advice. Consult your own counsel.
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Old 08-21-2007, 07:53 AM   #4
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Here is a link to the previous thread on this topic:

Estate Planning when spouse holds a green card
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Old 08-21-2007, 07:55 AM   #5
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Question for Sunseeker....

Can a QDT trust hold qualified assets (IRAs, 401k etc) for the non (US) citizen spouse ? If not then how do you handle those assets ? Can you defer the (immediate) paying of income taxes on the qualified assets upon transfer at your death ?
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Old 08-21-2007, 11:17 AM   #6
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I think the real kicker is if his DW predeceases him. In that case, if her assets are above $2 million, any of her US-based assets above $60k are taxed at 45%. Depending on where they live, her share of their principal residence could be eaten away pretty seriously.

The simplest cheapest approach is for her to become a citizen.
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Old 08-21-2007, 11:39 AM   #7
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If the QDT cannot hold qualified assets then upon the death of the citizen the non-citizen spouse must pay income tax of the tax-deferred nestegg upon transfer. If that nest-egg is substantial then half or so will go to (federal and state) income taxes leaving much less to fund a retirement.

This is in addition to any estate taxes.

Therefore the question about the viability of qualified assets in the QDT.

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