What kind of estate planning is appropriate for a non-US spouse? In most cases, the hereditary inheritance can be transferred to a US citizen without a property tax, thanks to a high amount of exemptions for US citizens and permanent residents in 2009 and an unlimited maritime deduction. However, if the spouse of the deceased is not a US citizen, the estate cannot claim a marine deduction - regardless of the citizenship of the deceased. This is not a problem if the asset is less than the corresponding amount of exclusion, or if the surviving spouse becomes a US citizen before filing a property tax return. But what if you are a non-resident alien and have an applicable exemption amount of only $ 60,000? Or, what if your spouse does not receive citizenship on time?
According to sections 2056 (d) and 2056A of the IRC code, a Qualified Domestic Trust (QDOT) is the only instrument by which a cash deduction can be claimed if one of the spouses is not a US citizen at the time of filing the property tax. QDOT allows families with a low amount of exemption or large property to defer property taxation, provide income to a surviving spouse, and create valuable time during which a surviving spouse can acquire US citizenship. The IRS allows QDOT because they defer property tax until the death of the other spouse: a tax deferment reduces the likelihood that the surviving spouse will require a maximum deduction and will illegally die in a foreign country, thereby avoiding all US taxes. In this article, we will discuss three reasons why people with a non-US citizen should consider real estate planning with QDOT and how to avoid multiple pitfalls.
First, the appeal of QDOTs to individuals with assets in excess of their applicable exemption amount.
Individuals with a non-US spouse often choose to set a QDOT to claim a residual deduction because their estates are above the applicable exclusion amount. As mentioned above, QDOT is the only tool with which you can claim a maximum deduction if one of the spouses is not a United Citizen. For non-resident foreigners, permanent residents of the United States, and citizens of the United States, QDOT planning should be seriously considered when assets exceeding the allowable exclusion amount are transferred to a non-US citizen.
Non-resident alien with US assets over $ 60,000 In addition to other strategies, QDOT planning should be seriously considered by non-resident foreigners with assets located in the United States that exceed $ 60,000. A non-resident alien may transfer only $ 60,000 in 2009 without incurring a tax rate of 45%. However, with QDOT property tax is deferred until the death of the second spouse.
US citizens and permanent residents with non-US citizens If in 2009 the estate of a US citizen or a permanent resident is less than 3.5 million. US dollars, the full amount can pass without tax, regardless of the nationality of the spouse. In addition, families with estates above $ 3.5 million. The US should consider using QDOT along with other real estate planning strategies to reserve a marine deduction. Families should keep in mind that in 2011, if Congress does not act, the corresponding amount of exemptions will drop to $ 1 million. If so, many families with estates in excess of $ 1 million, one day can benefit from QDOT planning. However, be that as it may, future changes in legislation are unclear.
The surviving spouse is a foreigner Another problem arises when a US citizen or a permanent resident has property below the allowable amount of exclusion, but where the surviving spouse is a non-resident foreigner. In such cases, the death of the surviving spouse may entail substantial property tax liabilities after his or her death. As mentioned above, non-resident aliens can only transfer US $ 60,000 in 2009 without incurring a tax rate of 45%. Such persons can take advantage of QDOT and other estate planning for international families.
The second reason: a lifetime income and real estate tax
To see the benefits of deferring revenue and taxes, consider the following example. Suppose that Ronald, a permanent resident of the United States, leaves in 2009, survived by two children and his wife, Marie. Marie is not a US citizen, and Ronald's property is 5.5 million dollars. For the purposes of this example, we assume that there is no joint ownership. The exceptional amount of Ronald is used to protect $ 3.5 million from property tax, which is transferred to his children through trust created before Ronald’s death. The remaining $ 2 million is transferred to Marie, in the form of a personal residence in California worth $ 1.5 million and $ 500,000 in commodity securities. Ronald did not create a QDOT during his lifetime. Here 2 million. The United States is usually taxed because, with the exception of the release of Ronald and Marie, there is no claim for a marine deduction. However, Marie works with a lawyer to create a QDOT, which pays a 5 percent share of a percent in order to retain assets. Marie then transfers the assets to QDOT before filing a property tax return. She pays the fair market value of the trustee to live in the residence, and the guardian pays Marie $ 100,000 per year. Marie receives additional distributions from QDOT to pay for trust management costs and provide funds in case of difficulties for herself or her children.
In the above example, QDOT from Marie allows you to defer property tax. Since Marie timely transferred assets to QDOT, the transfer of assets from Ronald’s property is not taxable at the time of Ronald’s death. In fact, in the example above, all federal taxes were excluded at the first death by using appropriate planning. Property tax will be deferred to the death of the other spouse - a huge advantage for Marie during her life. However, this does NOT mean that the surviving spouse will be able to offset the tax on QDOT assets with its applicable exclusion amount at the time of her death. Assuming that Marie will never become a US citizen, the property tax will be levied on QDOT assets by reference. Ronald & # 39; s real estate. However, at least she would have benefited from QDOT income throughout her life.
Third mind: QDOT buys time
QDOT, in the example above, buys Marie to acquire her American citizenship. If Marie ever becomes a US citizen before her death, the usual rules applicable to United States citizens to establish a marine deduction will apply. Accordingly, all 5.5 million dollars. The United States can go to children without assessing property taxes after Marie’s death. However, Marie must be resident for the entire period after Ronald’s death to avoid deferred property tax. The trustee must also promptly notify the IRS of the acquisition of Marie.
During the time that Marie acquires her citizenship, she can receive certain contributions that are not taxable by the QDOT, set out in section 2056A (b) of the IRC. First, it can receive income, such as a single amount between 3-5 percent. In the example above, Marie and her lawyer agreed with a maximum percentage of 5%. However, Marie cannot receive capital gains or a distribution of a principal without liability for the QDOT tax. Secondly, Marie can receive a distribution that is not taxed by the principal’s QDOT if she suffers from financial difficulties and does not have another reasonable source of funds for the health or care of her children. Thirdly, Marie can receive distributions from QDOT without a tax QDOT to pay for certain expenses and income taxes generated by QDOT. Finally, as soon as Marie becomes a US citizen, distribution can be made without imposing an IRD 2056A (b) QDOT tax.
Consider a lot of mistakes
Rules. From the case of Marie and Ronald, we can see some of the many rules governing QDOT. It is important to note that at least one of the trustees must be a US citizen or a corporation that has the right to withhold dividend amounts from the principal amount in order to pay a special tax on QDOT.
QDOT can be created by Ronald before his death, by the performer of Ronald or even by Marie herself. In some cases, a QDOT is created by reforming an existing trust or by litigation. In these situations, a QDOT must be created before filing a real estate tax return to avoid overlapping interest and penalties. In addition, the conditions of existing trust should be respected in order to avoid legal proceedings. Therefore, for QDOT it is usually easier to install before the death of the first spouse.
QDOT cannot pay dividends to the principal unless special agreements are agreed for the payment of taxes. Moreover, in situations where QDOT’s assets are significant, it is required that at least one of the proxies in the United States be a bank or that the trustee of the USA places a substantial bond based on the date of mortality of QDOT assets. In addition, since Marie can acquire US citizenship and QDOT in place, she should be created flexibly so that she can respond to such changes. This is not an exhaustive list of requirements for a valid QDOT, but it can give you some idea of the many rules that must be followed.
What if I die in 2010? The impact of the abolition of property tax in 2010 on QDOT is ambiguous. On the one hand, there will be no deferment of property tax for surviving spouses dying in 2010 in accordance with section 2210 (b) (2) of the IRC. On the other hand, any distributions from QDOT during 2010 (with exceptions) will be taxed by QDOT, as discussed above.
Not a panacea. Although QDOT has several advantages, it should not be considered as a solution of the same size for all. Some assets may not have the right to transfer to QDOT, and the costs of creating and maintaining a QDOT may be high compared to its benefits. Moreover, the requirement of the American trustee necessarily leads to a loss of control over the non-civil spouse and possible additional expenses. The expected valuation of QDOT assets, the amount of the final tax payable on the death of the other spouse, the ability to receive dividends without paying taxes on imprisonment during the life of the spouse, and the likelihood that the acquisition of a US citizenship by a minority will affect how much the tax deferral is under QDOT worth the pain and cost. In some situations, individuals may consider paying a death tax on the first spouse to outweigh the cost and complexity associated with QDOT.
Individuals and their families should also consider special rules governing co-ownership on death for non-US citizens. In accordance with section 2040 (a) of the IRC code, the rule of drawing of contributions may be applied when one of the spouses is not a US citizen, with the result that all property taxed by the inferior is included in common property. Moreover, international families must always take into account the role of foreign jurisdictions. Many civil law countries do not recognize trusts, which can lead to adverse tax consequences in another country. Moreover, the benefits of a property tax treaty can make QDOT unnecessary.
Conclusion: Consider Your Options.
QDOT is one of the many tools that are available to non-US citizens. The appropriate strategy should also consider gift and alternative testing devices. In all cases, the real estate plan must be properly coordinated with applicable contracts, rules from foreign jurisdiction and already existing real estate planning documents. Ideally, you should think about the advice and assistance of both foreign and domestic lawyers.
IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with IRS requirements, we inform you that any tax advice contained in this message (including any investments) is not intended or not intended to be used and cannot be used for this purpose fines in accordance with the Code of Internal Revenues or (ii) encourage, sell or recommend to the other party any transaction or issue covered in this document.
General information. This article is intended to provide general information about real estate planning strategies and should not be relied upon as a substitute for legal advice from a qualified lawyer.
