THE ANDERSEN FIRM A PROFESSIONAL CORPORATION. Non-Citizen Spouses

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1 ATTORNEYS AT LAW THE ANDERSEN FIRM A PROFESSIONAL CORPORATION Non-Citizen Spouses South Florida Office West Florida Office Florida Keys Office Tennessee Office New York Office Washington D.C. Office 500 E. Broward Blvd Bee Ridge Rd. 820 Whitehead St. 862 Med Tech Pkwy. 230 Park Ave. 601 PA Ave. NW Suite 1600 Sarasota, FL Key West, FL Suite th Floor Suite 900 South Bldg. Fort Lauderdale, FL Johnson City, TN New York, NY Wash. D.C

2 The Andersen Firm A Professional Corporation IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

3 The Andersen Firm A Professional Corporation Focus in Estate Planning & Administration. Multiple attorneys with Advanced Degrees in Estate Planning and Tax. Business Model focused on serving Financial Advisors and their clients.

4 Technical and Miscellaneous Revenue Act of 1988 Prior to this act a U.S. Citizen or Resident was allowed an unlimited Marital Deduction for both the federal gift and estate tax, regardless of the spouses citizenship.

5 Congress Acts Congress was concerned that Non Citizen Spouses would give up their US Residency after the U.S. Spouse passed away and return to their home country taking with them all the deceased spouses property and thus avoid US taxes.

6 Gift & Estate Tax Laws United States Citizens & Residents are subject to U.S. Gift and Estate Taxes on all their worldwide assets. There is no unlimited marital deduction for transfers to non-citizen spouses. Non-resident Aliens are subject to U.S. gift and estate tax on assets situated in the United States. Double taxation is a possibility since every county applies different rules to determine domicile.

7 Estate and Gift Tax Treaties The U.S. currently has a tax treaty that affects gift and estate taxes with 17 countries: Australia Austria Canada Denmark Germany Finland France Greece Ireland Italy Japan Netherlands Norway South Africa Sweden Switzerland U.K.

8 Considerations for Non-citizens Should I get a green card? Green card holders have permanent residency in the U.S. and allows for easy travel in and out of the country. However, green card holders will be subject to income tax on their worldwide assets, even if they are not living in the U.S. They will also be exposed to U.S. gift and estate taxes on all their assets regardless of which country the assets are held. What happens if I give up my green card? By giving up a green card a person is considered a nonresident alien but the IRS will still tax as if they were a resident for income tax purposes but will only be taxed on assets held in the U.S. for estate tax purposes.

9 Unlimited Marital Deduction When a marriage is between U.S. citizens, each spouse may give away during life or pass at death an unlimited amount of assets to one another. This is called, appropriately, the unlimited marital deduction. This unlimited marital deduction is very important because it allows estate planning attorneys to balance assets between husband and wife to ensure that each of their exemption amounts are captured The Andersen Firm, A Professional Corporation.

10 Non-Citizen Spouses This lack of tax free asset transfer between spouses can cause a estate tax train wreck during their life time and also upon death. A person can be determined a resident for income tax purposes and a nonresident for estate tax purposes. Thus, special planning and consideration must be paid when planning for Non-Citizen Spouses.

11 Current Laws Regarding Lifetime Transfers Between Resident & Non-resident Spouse Gifts up to the annual exclusion amount (currently $13,000) can be made to the spouse without a gift tax even if the spouse is a non-citizen spouse during their life. May also give up to $133,000 (2009 amount and indexed for inflation) annually to a non-citizen spouse without paying the gift tax. These type of gifts may be encouraged to reduce the impact of the marital deduction restrictions at death The Andersen Firm, A Professional Corporation.

12 Transfers at Death At death, gifts to the non-citizen spouse can qualify for the marital deduction and postpone estate tax only if the property is held in a Qualified Domestic Trust or QDOT.

13 Qualified Domestic Trust The underlying purpose of requiring use of the QDOT is to ensure collection of the estate tax on the death of the non-citizen spouse (who otherwise could remove the assets from the United States and deprive the IRS of its eventual inheritance).

14 Outright Distribution to Non-Citizen Spouse If the estate plan includes an outright gift to the spouse, the will or trust may provide for this. If the spouse is a non-citizen, it should include an option for the spouse to disclaim part or all of the outright gift, causing the property to instead pass to a QDOT for the spouse s benefit.

15 Outright Distribution to Non-Citizen Spouse Continued By disclaiming part or all of the gift to the trust gives the surviving spouse several options: Become a Citizen: must be done before the estate tax return is filed. Pay the Tax: only appropriate for a spouse who plans to leave the United States. Establish a QDOT

16 Requirements of a QDOT 1. Must have at least one trustee who is an individual U.S. citizen or a domestic corporation. 2. U.S. trustee must be able to withhold taxes due on any distributions of the trust principal. 3. Executor of the estate must make the QDOT election to qualify for the marital deduction.

17 Requirements of a QDOT Continued 4. If the QDOT has assets exceeding $2,000,000 (Large QDOT), the U.S. trustee must be a bank, or the individual U.S. trustee must furnish a bond or letter of credit to the U.S. Treasury for 65% of the value of the QDOT assets at the first spouse s death. 5. If the QDOT has assets less than $2,000,000 (Small QDOT), the Large QDOT requirements are only needed if the amount of real property located outside the U.S. accounts for more than 35% of all trust assets The Andersen Firm, A Professional Corporation.

18 Taxation of Assets Held in QDOT The QDOT defers taxation of the assets within it until the death of the surviving non-citizen spouse, distributions of trust principal or the termination of a trust as a QDOT. Income paid to the non-citizen spouse is taxed as income to the non-citizen spouse under the normal income tax rules. If any principal is paid out, the assets paid out are taxed as if they were included in the deceased citizen spouse s estate.

19 Taxation of Assets Held in QDOT At the death of the non-citizen spouse, the assets remaining in the QDOT are subject to the federal estate tax as though they were included in the estate of the deceased citizen spouse and are not included in the non-citizen spouse s estate. Any appreciation in the value of the assets would also be subject to tax upon the non-citizen spouse s death.

20 Example Husband dies, leaving a non-citizen spouse, Wife, and two children with the following assets: Bank Accounts: $100,000 Annuities: $160,000 Investment Account: $2,000,000 Residence: $500,000 Life Insurance Proceeds: $1,000,000 Total Assets = $3,760,000

21 Example: If all the property passes to the surviving spouse, normally there would be no estate tax due if the surviving spouse was a citizen. Since Wife is a non-citizen, no marital deduction is allowed. Husband may still use his $3,500,000 coupon but the remaining $260,000 results in a tax liability of $117,000 in If Husband s estate plan provided that all property passes to a QDOT for the benefit of his wife and there will be no tax upon the Husbands death.

22 Jointly Held Property Under federal law, the entire value of jointly owned property is included in the decedent s gross estate if the surviving spouse is not a citizen, subject to a reduction for any contribution by the surviving spouse. Under state law, the surviving spouse succeeds to the ownership of all the property through survivorship.

23 Jointly Held Property Transfer to QDOT If the surviving spouse cannot prove his/her contribution to the joint property, he/she can pay an estate tax or contribute all the property (including his/her interest) to a QDOT and defer the tax. Spouses may also consider undoing the joint ownership while they are alive and well.

24 Jointly Held Property Transfer to QDOT If spouses end up with ownership percentages that differ from their actual contributions, a taxable gift could result. To do this properly, the appropriate contributions of the spouses should be determined and ownership vested accordingly on the termination of the joint tenancy.

25 Jointly Held Property Cont. If a bank account is held jointly, it is not a gift until the noncontributing spouse withdraws the money from the account. However, if it is real property, it is a gift when the property is retitled from individual to jointly owned

26 Using Life Insurance to avoid QDOT Life insurance in an ILIT can be used to transfer more assets to a non-citizen spouse, without having them be subject to the estate tax in either spouse s estate. Still must consider the gift tax consequences discussed above when paying the premiums if a single life ILIT. If the life insurance is held outside of an ILIT, it is subject to the rules above and possible taxation.

27 Conclusion Both U.S. Residents and Nonresident aliens are subject to federal income tax and may be subject to federal & state estate taxes. Also, gifts made during life may also be subject to state & federal gift tax. The death of a non-u.s. citizen could have adverse estate tax consequences if the proper planning has not been done. Consult an Attorney to analyze each individual situation.

28 The Financial Advisors Easy 3 Step Process for Estate Planning 1. Call Angela Christian at to set up an appointment for client. 2. Ask client for current estate-planning documents and forward them to The Andersen Firm. 3. Ask clients to fill out snapshot questionnaire and forward to The Andersen Firm.

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