There are a lot of misconceptions about whether people who aren’t U.S. citizens can inherit assets. If you’re a U.S. citizen and your spouse hasn’t yet obtained citizenship, you may be putting off your estate planning until that process is complete.
However, that could end up costing them a lot of money if you were to pass away before they became a naturalized citizen. Or maybe your spouse is perfectly happy being a lawful permanent resident and has no interest in going through the naturalization process.
Whatever the case, you can provide for them in your estate plan in a way that will save them from having to pay federal estate tax. (Pennsylvania doesn’t have a state estate tax.) A qualified domestic trust (QDOT) is a good estate planning tool for that purpose.
How does a QDOT work?
Surviving spouses who are U.S. citizens get a 100% marital deduction of any inheritances up to the maximum amount currently allowed (just over $12 million this year). Surviving spouses who aren’t U.S. citizens, however, have to pay estate tax on their full inheritance unless it’s in a specific kind of trust. If assets are placed in a QDOT, the beneficiary doesn’t have to pay estate tax for any amount up to the maximum, even if they’re not a citizen.
It’s crucial to set up a QDOT correctly. For example, a QDOT must be funded prior to the death of the spouse who sets it up. Further, the trustee (or one of them if you designate two or more) must be a U.S. citizen.
It’s also important to know that the trust isn’t fully tax exempt. While the surviving spouse isn’t taxed if it’s under the maximum, if there are assets remaining in the trust when they pass away, their beneficiary can be subject to estate tax.
We’ve just scratched the surface of estate planning when you have a non-citizen spouse. There are other options for helping to ensure that your spouse is provided for should you predecease them. Having experienced legal guidance is crucial.