Estate Planning when spouse holds a green card

[Tigam]

Hi, I am a newbie to this site (still working). My retired friends are raving about this site, so here I am. I have an Estate Planning question that my retired friends tell me this site could answer.

I am a US citizen (healthy 50's) 20+ years married to a Danish national (resident alien green card status-first and only marraiges both) who has lived and worked in California over 20 years. We have teenage children entering college. My wife wishes to maintain her Danish citizenship and her green card status. We are in the medical field and we are flummoxed by the legal-ese in which much estate information is formatted. We would like to avoid probate and set up living wills and power of attorney.

We have a will but have not done any other estate planning as yet. I am told that estate planning for our situation is difficult and unique. I can't find many details on the web concerning estate planning for couples where a Danish resident alien is married to a US citizen. I have been told that there may be severe tax consequences for our estate if we don't start planning, but I am told that estate tax treaties between Denmark and America make this more complex.

We have contacted the Danish Embassy but they have not been able to help, as they indicated this an American legal situation.

Has anyone in the forum been in a similar situation? What did you do? How do we find information about what type of estate planning we need for our unique situation? How do we find out the advantages/disavantages of the various types of trusts for us- A/B, QDOT, QTIP, etc? Should we consult a specialist estate tax attorney? What type of specialist? Can we do this ourselves? Do we even need a trust, as it appears that death taxes are being phased out?

Thanks for reading this!!



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[Elspeth]

The estate tax may well be phased out, but you might find it's just for US citizens and that foreigners are still subject to it. Even if that's not the case, another government might end up bringing it back. They've got a war to pay for, after all, and it's always easiest to target people who can't retaliate by voting.

There were some fairly horrifying stories about noncitizen spouses of 9/11 victims and the tax bills they were presented with because of being noncitizen survivors (and, at least in one case, deportation papers, but that's another story).

My husband and I are both British citizens resident in the USA with green cards, and so whichever of us dies first will leave the other with a major tax bill if we don't get a trust set up to avoid it. We were recommended to a lawyer by another British expat who's been through all this and set up the trust, and we're in the process of dealing with it now.

I suggest that you contact a specialist estate tax attorney who has experience in dealing with noncitizen issues. This may not be a situation that's safe to leave to amateurs.

The alternative, which has been suggested to us an annoying number of times and which has eventually been the option used by some green card holders to avoid this very situation, is for your wife to take US citizenship to ensure that you can leave your money to your children and not make a present of it to the US government. In our case, since we don't have children, that incentive doesn't apply.

 

[chris2008]

I am more of a general legal counsel (and based in Germany) with some tiny bits of (international) estate experience, so US / Danish estate / tax experts may know more and better.
The general rule in all jurisdictions I am aware of is that the place of your property and your residency decides which country's estate law and tax apply. Tax treaties apply when there is a mix.
So if none of your property is in Denmark but all in USA and your residency is in USA at the end of life end even more your marriage was done in USA there is a good chance that there are no implications of Danish estate and tax law at all.
This might be good first read. Although the headline relates to Europe, some basics of danish estate tax are described and tax treaties with US are also indicated so that you can reasearch:
www.eatlp.org/uploads/Public/Maastricht_Denmark.doc

 

[Texas Proud]

You did not say how big of an estate you are talking about.... it does play a factor...

But, I did not think there was a difference in a citizen spouse and a 'green card' spouse when it came to the estate deduction... ie, if you left everything to your wife you paid not taxes... but when she dies the whole estate gets hit (hint, bypass trust)...

Now, you can leave your assets to your children in trust with a life estate to your wife when she lives....



BUT, and here is the big kicker..... DON'T BE CHEAP WHEN IT COMES TO YOUR ESTATE... if you have a big enough estate where you have to worry about estate taxes, you have enough money to pay a lawyer a few grand to protect it... and the cost for being wrong can be in the millions if you do not do it properly (I have seen it when I did taxes)...

 

[FIREd]

Tigam,

Being a green card holder myself, I was very interested by your question because I always assumed that being a resident for tax purposes, I was under the same tax regime as my wife (a US citizen) when it came to income taxes AND estate taxes. After doing some research on the subject, I am now freaking out. I had no idea that if my wife died, I would owe up to 55% in estate tax on her entire estate (including life insurance proceeds) . ... Are you kidding me with this?? And the worst part is that you can't get around to owing that estate tax (even is your estate is worth less than $2M), you can only delay paying it by setting up what's called a Qualified Domestic Trust (QDOT). This is what I understand: Your assets should be transferred to the QDOT trust upon your death (it can be more complicated if you have US -citizen children, read 3rd link below). Then your non US-citizen wife will be able to receive the estate tax-free income generated by the assets from the trust but if she needs to dip into the principal, she will have to pay estate taxes on that portion. Upon her death though, estate taxes will be owed upon the remaining principal held in the QDOT trust. The QDOT trust only helps defer the payment of estate taxes.

Of course, if she dies first, her estate will passed onto you tax free if it is worth less than $2M (or whatever the exemption is at the time) and you won't have to worry about all that QDOT business.

I found 3 very interesting articles online that could help you start with this estate planning nightmare:

Estate Planning - US Citizen Transfers to Non-Citizen Spouses
Planning for Non-U.S. Citizen Clients
Estate Planning

I found those articles by Googling -"estate tax" non-US citizen-. You might want to do that yourself to find other potentially interesting articles. I leave you to it now, because I've got a QDOT to set up...

 

[FIREd]

Oh and the information I provided is only applicable if both you and your wife remain in the US (leaving the US permanently takes the whole thing to a completely different level - see expatriate estate and gifting rules that changed in 2004). It also works as long as your wife does not have assets in Denmark she wishes to pass onto you (in this case, Danish estate rules and tax treaty with the US will come into play also). Whether she is Danish, or German, or Swiss, has very little importance if all her assets are in the US and she is a green card holder.

 

[Sarah in SC]

The QDOT is really a must, and the marital estate tax deduction is not unlimited in your situation, it is actually quite small ($100k IIRC). The choice of trustees is also a factor. Start asking around (maybe the trust department of a bank) for estate attorneys that are familiar with the non-US spouse plus community property state set of circumstances. I'll second the don't scrimp here voices, as this is not a place to make mistakes.
Good luck!
Sarah

Here is a short thread on the subject here:
http://www.early-retirement.org/forums/f28/qdot-and-living-trust-25524.html

 

[Elspeth]

Oh and the information I provided is only applicable if both you and your wife remain in the US (leaving the US permanently takes the whole thing to a completely different level - see expatriate estate and gifting rules that changed in 2004).

Do you have any links about that?

Between this law in the USA and the rather nebulous definition of domicile in the UK, I'm wondering if both the US and UK governments would simultaneously expect to help themselves to taxes based on our worldwide assets as soon as either my husband or I died.

 

[MasterBlaster]

Here is something for you to be concerned about...

If you (as a US citizen) have any qualified accounts (tax deferred IRA's, 401ks, etc), then upon your death all of the qualified accounts will be subject to immediate income taxation upon distribution to the foreign national (your spouse). So if you have a big nest egg that you had intended to provide for the spouse over many years then the US government and possibly state government will take a big bite out of that nestegg. The income taxes alone could take half of the nestegg.

Any probate costs are on top of that.

 

[FIREd]

In a previous thread on the subject, a poster wrote:

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

So here Peter thinks that establishing a QDOT is necessary only if the estate is worth more than $2M. Anything under that amount would not currently be taxed. So it would be like a kid inheriting from his parents? I don't know if that's true, I haven't found any literature which can confirm that.

I found another article here:
Estate Planning for Non-Resident Spouses
From this article and the others it sounds like the $2M exemption does not apply in the case of a non-US citizen.

Elspeth, I'll try to find those articles again. But briefly it said that even if you renounce your US citizenship or permanent residency and move back to your country of origin, you might still be on the hook to pay estate taxes in the US in some cases.

Masterblaster, if you set a QDOT trust, would you have to liquidate the US-citizen's tax-defered accounts at once or could you do like kids do when they receive an IRA from their parents i.e. they are only required to take RMDs each year in order to minimize the tax bite? I don't know the intricate workings of trusts, but could one put an IRA in the trust, let the trust pay income taxes on the RMDs each year but roll over the RMDs in another account within the trust so as not to have to pay estate taxes on the distributions?

 

[Elspeth]

Elspeth, I'll try to find those articles again.

Thank you; that would be much appreciated.

But briefly it said that even if you renounce your US citizenship or permanent residency and move back to your country of origin, you might still be on the hook to pay estate taxes in the US in some cases.

Why does this not surprise me? We're in a rather invidious position at the moment of owning property in the UK which we can't do anything about because it's a half ownership of the house that my husband's mother lives in, and she can't afford to buy out his half. There's also a joint bank account there which we keep topped up so she can use it if she runs into financial problems. I'm just waiting for the UK government to decide that we therefore still have UK domicile despite having lived in the USA for nearly 30 years even if we don't ever go back there to live and thus wants to tax our entire estate when the first one of us dies, while the US government decides to help itself to massive amounts of taxes on account of our noncitizen status.

This bloody lawyer is taking a lot of time to get round to dealing with the trust. I just hope he gets his act together sooner rather than later. They must be really tired of hearing from me with the "how's it coming along?" question every few weeks.

 

[MasterBlaster]

Masterblaster, if you set a QDOT trust, would you have to liquidate the US-citizen's tax-defered accounts at once or could you do like kids do when they receive an IRA from their parents i.e. they are only required to take RMDs each year in order to minimize the tax bite? I don't know the intricate workings of trusts, but could one put an IRA in the trust, let the trust pay income taxes on the RMDs each year but roll over the RMDs in another account within the trust so as not to have to pay estate taxes on the distributions?

I don't believe that a QDOT trust can hold qualified assets. See a good estate attorney on this. There are separate trusts available to hold qualified assets. The foreign spouse would then only owe US taxes only as the money is withdrawn (as with any IRA/401k). I don't know what the rules are about RMD withdrawals. I assume that there are limits to how long the money can be left in the trust.

But you have to set up the trust. A will or just a beneficiary designation won't cut it.

 

[FIREd]

Here it says that until next year, as long as your taxable estate is valued at less than $2M, you can transfer all your assets tax free to whomever you wish... I assume it also includes resident aliens...
Estate Tax Questions

From IRS Form 706:

surviving spouse is not a U.S. citizen. The marital deduction
is allowed for property passing to such a surviving spouse in
a​

​

qualified domestic trust (QDOT) or if such property is
transferred or irrevocably assigned to such a trust before the
estate tax return is filed. The executor must elect qualified
domestic trust status on this return. See the instructions that
follow, on pages 29 and 30, for details on the election.​

http://www.irs.gov/pub/irs-pdf/f706.pdf

So according to the IRS, the QDOT trust is a way for non-US citizen spouses to circumvent the fact that marital deduction (which is a provision allowing a deceased spouse to pass an unlimited amount of property to his/her spouse free of estate and gift taxes) is not allowed when assets are passed directly from a US citizen to his/her non-US citizen spouse. So A US-citizen cannot pass an unlimited amount of property to his/her non-US citizen spouse, but I believe that it does not impact the fact that the first $2M should be able to transfer tax free (at least until next year). The marital deduction I believe is only relevant for taxable estates with a value superior to $2M.


Elspeth, here is something to chew on:
Some Nonresidents with U.S. Assets Must File Estate Tax Returns
and for more complete information:
Instructions for Form 706-NA (10/2006)
The UK has a death tax treaty with the US, so it might give you a bit of relief from double taxation...

 

[haydee]

I find this topic very interesting, my spouse is a green card holder. Most of our holdings are joint, joint brokerage accounts and the house is held jointly too. Are we "transferring assets" if we are both owners of something? Is this a way around?

 

[haydee]

I was wondering, is this all based on the status of the spouse at death, or could a spouse become a US citizen after the fact and before the estate taxes are due get to skip all this?

 

[FIREd]

Haydee,

Yes if the non-US citizen spouse becomes a citizen before the estate taxes are to be paid but after the US citizen's death, there is no need to do anything (at least that's how I understand it because what matters is the citizenship status of the beneficiary at the time of the filing). However, it takes years between the time one files for citizenship and the time one becomes a citizen, and so the procedure would have to be started years before the death of the US spouse. So unless your spouse is "lucky" , it is unlikely that your spouse would become a citizen in the few months separating your death and the tax filing.

 

[MasterBlaster]

However, it takes years between the time one files for citizenship and the time one becomes a citizen

That is not true. Remember also that the OP's spouse already has a green card (which can take awhile). Assuming that the spouse has been in the US for some number of years, the citizenship application should go relatively quickly. They'll have to pass an English and a US history/civics test to get their citizenship.

 

[FIREd]

I find this topic very interesting, my spouse is a green card holder. Most of our holdings are joint, joint brokerage accounts and the house is held jointly too. Are we "transferring assets" if we are both owners of something? Is this a way around?

Yeah can you imagine if you have to pay taxes on half your joint checking account, half your joint savings account, half your house (which you own in joint tenancy with rights of survivorship), half your joint investment accounts... It would be outrageous!!! But sadly I don't know whether that's how it works or not...
And think about that... if masterblaster is right, you can't even rollover your spouse IRA or 401K in your trust. You would have to cash it in, pay income tax (for me about 40%), plus the estate tax on top of that (up to 55%)... Now that could make me cry.

Assuming that the spouse has been in the US for some number of years, the citizenship application should go relatively quickly. They'll have to pass an English and a US history/civics test

Well, I am eligible for US citizenship and I have been contemplating filing an application but last time I checked it took about 2 years at my local INS office... OK that was 2 years ago, but I doubt it got much better...

 

[MasterBlaster]

Well, I am eligible for US citizenship and I have been contemplating filing an application but last time I checked it took about 2 years at my local INS office... OK that was 2 years ago, but I doubt it got much better...

I looked up the stats for my nearby office and in July they were processing December 2006 applications. So there is about a 6 month backlog. My post though was to point out that there is no wait for a 2-year or 5 year residence period if the spouse is a US citizen. That wouldn't have applied anyway to the OP's spouse as they have been here 20 years or so. The whole process should be complete is less than a year if you have all of your documentation together. So to imply that the whole process takes years overstates the timeframe.

 

[FIREd]

I looked up the stats for my nearby office and in July they were processing December 2006 applications. So there is about a 6 month backlog. My post though was to point out that there is no wait for a 2-year or 5 year residence period if the spouse is a US citizen. That wouldn't have applied anyway to the OP's spouse as they have been here 20 years or so. The whole process should be complete is less than a year if you have all of your documentation together. So to imply that the whole process takes years overstates the timeframe.

My bad. I stand corrected. My local office is now processing the December 2006 applications. So it did get better over the past year (when I applied for my green card 7 years ago, they had several years backlog)... Maybe I should go ahead then and file...

 

[haydee]

Would all this be avoided if all our accounts were in my husbands name instead of joint. It might be tricky with the new accounts, but should bea easy to save all new money under his name. Since I should be able to inherit him easily. I trust him completely. I am assuming at some point I will need to get this looked at by a professional, but we are young now. I am in a community property state, so I am not sure if that would work.

 

[Tigam]

I want to thank everyone for their replies and links. This is really boggling my brain. My children are dual US/Danish citizens now.

Texas Proud, concerning the "estate size," do IRAs, 401k.s life insurance, pensions, and mortgages count? How do you value pensions in an estate? A very rough total figure is 2.5 million for my wife and myself outside of life insurance.

My understanding from this information is that I have a $2m unified credit which can be passed free of federal estate taxes to my resident alien spouse, but it is the excess over this that does not qualify for the unlimited marital deduction. Does this mean our 2.5 million is split in half to get 1.25 million as an estate I am giving her on my death (i.e am I under the 2 million exemption if i pass away now, or do they use the whole estate at 2 million, in which case I am over the 2 million?)

If I am under the 2 million, Should I still consider a QDOT, as my estate may be larger when I pass on (hopefully in 30-40 years from now)? It would be very difficult for my wife to set this up if I died, as she has little familiarity with US laws. The monetary qualifications for a QDOT trustee seems very high, as these articles imply they basically have to guarentee the money won't flee the country. It seems the best logical choice for a trustee would be a banker, not a friend, but this sounds quite expensive to set up. I'm kind of a do-it-yourselfer, but I realize I am way out of my comfort zone here. What happens to a QDOT if both parents die? Can I create an A/B trust that satisfies QDOT criteria?

Firedreamer, thanks for your articles. The article on "estate planning" is quite scary. The solution of three trusts, however also sounds scary and quite expensive (800,000$ of costs? Yikes!!). What do you think about this solution of three trusts?

Elsbeth, how do you find an attorney whom is really familiar with and good at resident alien spouse estate planning issues?

Masterblaster, is this true that IRAs will be imediately taxed when they transfer to the primary beneficiary, my alien resident wife? If so, can you put IRAs and 401 k's and pensions inside a trust? If not, is there any way to tax-protect them?

Sarah in SC, how much should I expect to pay for creation of the trust?

Thanks agian to all reading this!

 

[ladelfina]

I am as much up a creek as anyone else.. certainly under the estate tax limits now, but who knows in 30-40 years...

Don't have much to add except to respond to haydee:
I don't believe it is the creation of the joint tenancy for accounts/house, etc. that triggers the "transfer" of assets for IRS purposes; apparently this is triggered at the dissolution of the jt. tenancy (for death or other reasons). Wish I had investigated this further before co-mingling our $/€.

 

[Sarah in SC]

Go to the trust department of a decent sized bank in your town and talk to them about this. They can provide referrals to good estate attorneys and can give you an idea of costs. The trustee can be a US citizen or US corporation, so you could have a qualified trustee that isn't a bank, but for peace of mind that may be your best course of action.
When all of your assets are included (your gross estate includes all assets, including retirement, life insurance policies and personal property) it is easy to see how quickly your estate can become taxable.
Good that you are working on this now!
Sarah

 

[MasterBlaster]

Masterblaster, is this true that IRAs will be imediately taxed when they transfer to the primary beneficiary, my alien resident wife? If so, can you put IRAs and 401 k's and pensions inside a trust? If not, is there any way to tax-protect them?

Yes there are trusts that can hold IRA and other qualified assets for a non -US citizen or for others. The pension being a payment stream would pass to the benefiaciary. If you want the payment stream to flow to the trust to allow it to accumulate then that may be possible. There are also some things that you may be able to do in a trust that you can't do in a beneficiary designation such as have exact dollar amounts or different percentages flow to different individuals.

Again it is my understanding that these qualified assets are treated differently upon your death than after tax assets. Also it is my understanding that your after tax trust cannot hold qualified assets.

These are some pretty tricky areas. I don't think that the do-it-yourself route is not the way to go. You should find and talk to a good estate planning attorney.