Couple Planning Their Estate with Financial Advisor

Estate Planning With a Non-Citizen Spouse

The Elder & Disability Law Firm, APC March 21, 2023

Estate planning involves designating beneficiaries for your loved ones when you’re gone. Most people think of this as creating a last will and testament, which is generally the basic building block, but going beyond a will, a trust offers benefits over a simple will. For one, if your assets are in a trust, they will pass to your beneficiaries outside of probate court proceedings. Probate can take months and even more than a year if there are challenges.  

If your spouse is a non-citizen, does this change the estate planning process? When it comes to taxes, a non-citizen spouse who inherits your estate will be free of estate taxes so long as the estate doesn’t exceed the statutory limit of $12.92 million dollars. The non-citizen spouse need only show that they are a resident.   

However, there is also something called an unlimited marital deduction that allows you to transfer any amount to your spouse tax-free, but this only applies if your spouse is a citizen. To get around this exclusion, you should consider setting up what is called a Qualified Domestic Trust (QDOT). A QDOT allows the non-citizen spouse to qualify for the unlimited marital deduction.  

If you have a non-citizen spouse and are looking to create an estate plan in or around Redlands, California, contact The Elder & Disability Law Firm, APC. The estate planning attorney will discuss all your options and create a comprehensive plan to ensure peace of mind for you and your spouse going forward. The firm also serves clients in Rancho Cucamonga, Palm Springs, Riverside, and surrounding communities. 

Can Non-citizens Inherit Property? 

As discussed briefly above, a non-citizen who can prove residency can inherit up to the federal estate-tax exemption of $12.92 million in 2023. The Internal Revenue Service (IRS) weighs several factors in determining residency. Factors considered include time spent in the U.S., as opposed to being abroad, the locations and relative values of your residences and business interests, visa status, community ties, and the location of family members.  

Under the Internal Revenue Code (I.R.C.), a spouse can also make a tax-free gift of $17,000 to a spouse each year, which can be doubled if the spouse is a resident or citizen in a process called gift-splitting. 

What Does a QDOT Accomplish? 

A Qualified Domestic Trust (QDOT) is allowed under I.R.C. Section 2056A. Since the IRS fears that a non-citizen spouse may leave the country with the inherited money and never pay taxes on the sum, a QDOT allows the funds to be placed in a trust. The QDOT’s trustee or trustees would then make periodic taxable distributions to the surviving non-citizen spouse, and when that person passes away, pay taxes on the remainder. There are, of course, several qualifications for setting up a QDOT.  

The I.R.C. recognizes two types of QDOTs – small and large. A large QDOT is one with $2 million or more in assets. For a small QDOT, at least one trustee must be a U.S. citizen. For a large QDOT, at least one of the trustees must be a U.S. bank or trust company. Plus, the trustee must furnish a bond or letter of credit equaling 65 percent of the fair market value of the assets in the trust. No bond is needed for a small QDOT unless 35 percent or more of the assets consist of real estate located outside the U.S. 

Protect Your Spouse by Following the Law 

If your spouse is a non-citizen, you should definitely consider all estate planning options, including the creation of a QDOT, to avoid tax hurdles when you pass on. The estate planning attorney at The Elder & Disability Law Firm, APC, will review your circumstances with you and advise you of the best path going forward. Reach out immediately if you’re in Redlands, Palm Springs, Rancho Cucamonga, Riverside, or neighboring areas.