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QDOT and Living Trust
Old 02-02-2007, 09:50 AM   #1
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QDOT and Living Trust

Hi!

I really need some help with this.

My wife is a resident alien with a green card. I am trying to determine if I need to setup a QDOT for her. I have heard and read different amounts that she can inherit without paying estate taxes. I've heard that it is anywhere from $100k to $1.5mil. Does anyone know where I can get up to date information about this without going to an estate lawyer?

Some further information is that we are both retired and the total NW is 1.3mil including the house. Most of that money is in my IRA. The house is worth about $550k.

I have also heard that I can gift her up to $100k per year without any problems, is this true?

We are planing on moving in the next year or two and should I put the new house entirely in her name to reduce the size of the estate that she would inherit?

I have brought up the subject that we need a living trust with a QDOT provision but she is against it saying that we don't need one. She has heard some stories from people that she knows about the problems that they have had problems with their trusts. She could not explain what type of trust they had so I take the problems with a grain of salt.

I need help with information to present to her to try and change her mind and to relieve my concerns that when I pass she will have to pay a lot of estate taxes.

She says that she is going to apply to become a citizen but that can take years and years. I need some sort of work around in the mean time.

Thanks
Larry
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Re: QDOT and Living Trust
Old 02-02-2007, 11:51 AM   #2
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Re: QDOT and Living Trust

I can answer some of your questions, having been through this 10 years ago when my wife died. Obviously the information is 10 years old, but I don't think the key points will have changed.

First, the estate tax exemption when passing to a spouse does NOT apply if the spouse isn't a US citizen. Unless there is some time constraint, perhaps the best route would be to take citizenship. However, my wife only had a few months to live so this wasn't an option.

I took professional advice and was told that estate tax liability can be avoided by setting up a QDOT. Subsequently, if I became a citizen, the assets of the QDOT could be transferred out without paying tax.

This is basically what I did. Events played out as expected, no problems on the financial side.

However this is not in my opinion something that's a DIY exercise. Definitely work with someone who has specific experience with estate taxes, Green Card holders, etc.

Peter
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Re: QDOT and Living Trust
Old 02-02-2007, 01:54 PM   #3
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Re: QDOT and Living Trust

Thanks Peter.

I don't have a problem with inheriting from her since I am a US citizen. I also am not going to try and DIY this problem myself. I am basically looking for a source of information that I can read so that when I do go to an estate lawyer I will know enough so that he cannot pull the wool over my eyes and do something that is not correct or is not necessary.

There must be a gov document somewhere that explains what happens when a resident alien inherits.

I will keep looking.

Thanks
Larry
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Re: QDOT and Living Trust
Old 02-02-2007, 01:56 PM   #4
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Re: QDOT and Living Trust

Relax....

We are in the same situation and I was panicked for months before we took some advice on this from an estate planning attorney as I also could not find any clear direction from research on the internet.

Even though your DW is a non-citizen she is still entitled to her own unified credit amount which is $2m (for this year) which she can pass to anyone she likes. Anything in excess of $2m she can pass free of federal estate tax to a US citizen spouse. This would then form part of the spouse's assets to be taxed on his death in the usual way.

If you were to pass first you also have a $2m unified credit which can be passed free of federal estate taxes to your spouse, or anyone else for that matter. It is the excess over this that does not qualify for the unlimited marital deduction. Therefore, if your assets are more than $2m then you need to consider a QDOT. According to the attorney we spoke to the QDOT can be set up after the death of the citizen spouse, but it has to be done within a few months. It does not have to be now.

As Peter says, if your DW decides to take citizenship before your death this situation would not arise. We have some friends going through the naturalization process at the moment and I believe it does not take too long, a few months at most, less than a year.

We are in TX, which is a community property state and also has no state estate taxes. I don't know how your state taxes estates. Please take proper professional advice, it will ease your mind.

Almost forgot, if your DW is a Canadian citizen there are different and more lenient rules for passing assets between spouses in that situation.
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Re: QDOT and Living Trust
Old 02-02-2007, 04:16 PM   #5
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Re: QDOT and Living Trust

Quote:
Originally Posted by jj

If you were to pass first you also have a $2m unified credit which can be passed free of federal estate taxes to your spouse, or anyone else for that matter.
Are you sure this is right? It's possible that the rules have changed since I faced the issue, but this link would appear to say something else:

http://www.pmstax.com/estate/nraliens.html

... At death, gifts to your non-citizen spouse can qualify for the marital deduction and avoid estate tax only if the property is held in a special trust for the non-citizen spouse's benefit, sometimes called a "qualified domestic trust" or "QDOT trust." ....

Peter
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After further investigation ...
Old 02-02-2007, 04:28 PM   #6
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After further investigation ...

Quote:
Originally Posted by Peter
It's possible that the rules have changed since I faced the issue
Yes, well of course they have! In 1997, the exemption amount was only $300k, and this would have meant a significant taxable estate.

Now, as jj points out, it is $2MM, quite a difference. And it is only amounts over this that are taxable for transfers to a non-citizen spouse.

Sorry for the misinformation. I should have checked current data.

Peter
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Re: QDOT and Living Trust
Old 02-03-2007, 06:20 AM   #7
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Re: QDOT and Living Trust

Quote:
Originally Posted by Peter
it is $2MM, quite a difference
No one knows what is going to happen to estate taxes after 2010. If the unified credit amount goes back to $1m then I would suspect that thousands more people will be put back into a situation of having to worry about this, especially if the married couple's joint estate is unevenly split.

Jaction, please share any information that you may glean on this subject. I do not personally know anyone who has had to go through with a QDOT although it sounds a very expensive proposition, what with the US trustees that must be employed, legal fees, etc. Everyone we know has had advice to go the citizenship route, which does seem a lot simpler and cheaper, but may not be what people wish to do.

Good luck!
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Re: QDOT and Living Trust
Old 02-03-2007, 09:31 AM   #8
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Re: QDOT and Living Trust

Thanks to everyone for their replies. It sounds like that the martial exemption for a resident alien is the same as the estate exemption unlike being unlimited for US citizens. If that is the case then I don't have anything to worry about till 2010 or 2011 when it reverts to $1mil, which we all assume and hope does not happen.

I don't know anyone that has used a QDOT or even set one up. I think it is set up as part of a living trust, I could be wrong and usually am. Therefore the cost could be substantial. The trustees would be my DD and her husband if they would agree.

The DW is in the process of getting her green card renewed, which has been a long drawn out affair. It has taken almost a year. She has a problem in that she does not give readable finger prints due to having really dry skin. Therefore she had to have a police background check done for each local we have lived in in the last 20 years. She says that once that happens she is going to start the paper work for becoming a citizen. Hopefully that will happen before 2010 or 2011.

Thanks
Larry
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Re: QDOT and Living Trust
Old 02-04-2007, 12:37 PM   #9
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Re: QDOT and Living Trust

From my current copy of Estate Planning for Financial Planners: The unlimited estate tax marital deduction is not available for an outright bequest to a surviving spouse if the surviving spouse is not a US citizen. For non-citizen spouses, there is a special annual exclusion amount of $ 117,000 available for lifetime transfers by citizen spouse to the non-citizen spouse.
A remedy is to have the non-citizen spouse become a citizen before the due date of the estate tax return and maintain residency in the US following the death of the decedent-spouse. If both of these conditions are met, the transfer to the surviving spouse will qualify for the unlimited estate tax marital deduction.

The purpose of these restrictions is to ensure that the deferral of tax provided by the marital deduction does not prevent the US from eventually getting it's money by the non-citizen spouse heading home with Uncle Sam's money!

The QDOT requires the following requirements be met in order to qualify for the deduction:
1 at least one of the QDOT ttees must be a US citizen or US corporation.
2 the trust must prohibit distribution of principal unless the US citizen tttee has the right to withhold estate tax on the distribution
3 the ttee must keep a sufficient amount of trust assets in the US to ensure the payment of federal estate taxes upon the death of the non-citizen surviving spouse
4 the executor of citizen-spouse's estate must elect to have the marital deduction apply to the trust

The surviving spouse is entitled to receive all of the income of QDOT for life, but if the principal is distributed during lifetime, the distribution will be subject to estate tax.

Hope this helps, and I appreciate the opportunity to beat imprint this into my brain before my exam in May!

Sarah
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Old 03-21-2011, 09:42 AM   #10
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I came to the US a few months ago. Basically, my wife owned nothing and all the assets we now own have come from my estate that was liquidated before I came to the US. The real estate and brokerage accounts that we have here were funded from the money I brought in from overseas. Incidentally, I paid tax on them there.

Being a responsible husband, I put everything we own in both our names. I do plan on becoming a citizen one day but that is going to take time. Until then, should my wife pass away before me, I will have to pay tax on stuff that I 'inherit' that was mine in the first place.
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