If your partner is not a U.S. citizen and your estate is large enough to pay estate taxes when you die, you might need some additional estate planning.
Your estate will have to pay federal estate taxes when you pass away if the net value (assets minus debts) is more than the exempt amount at that time. In 2016, the federal estate tax exemption is $5.45 million; every dollar over the exempt amount is taxed at 40%. The exemption adjusts yearly for inflation. State estate/inheritance taxes vary, but because they may use at a lower threshold, your estate might be exempt from federal tax and still need to pay a state tax.
If your spouse is a U.S. resident, you can leave him or her an endless amount of possessions without any estate taxes when you die using the unrestricted marital reduction. Uncle Sam lets you do this due to the fact that he plans to collect the taxes when your surviving spouse dies.
But if your spouse is not a U.S. resident, she or he might perhaps take the assets after you pass away and leave the nation with them … which would leave Uncle Sam empty handed. He merely does not want non-citizen partners to acquire large estates and then return to their homelands without paying any estate taxes. Non-citizen spouses do not get the advantage of the unrestricted marital deduction.
The outcome is that, if your spouse is not a U.S. person and you do not prepare ahead, everything in your estate over the quantity of the estate tax exemption when you die will go through estate taxes. A qualified domestic trust (QDOT or QDT) can prevent this from taking place.
The possessions that are moved to this trust are not taxed when you pass away, so the entire estate is offered to attend to your surviving spouse. The trust (not your spouse) owns the properties, however your partner can get income from the trust and, with the trustee’s approval, might likewise get principal.
The income your partner gets from the QDOT is taxed as regular income in the year it is gotten. But any primary your partner receives (unless the circulation is because of “difficulty” as specified by the IRS), plus assets remaining in the QDOT when your spouse dies, will be taxed as if they became part of your estate when you died (at your highest estate tax rate).
Without a QDOT, these estate taxes would have to be paid when you die. But with a QDOT, the taxes are delayed until your enduring spouse dies, which suggests more assets are readily available to offer your partner.
To make sure estate taxes are paid when your spouse passes away, at least one trustee of the QDOT must be a U.S. citizen or U.S. corporation. (Sometimes an enduring spouse wants to go back to his/her homeland and finds it would be easier to have actually the trust administered there, however their nation does not license trusts or enable trusts to have U.S. trustees. In these circumstances, Congress might permit the requirement for a U.S. trustee to be waived and a similar legal arrangement to be utilized instead of a trust.).