Did You Marry for Love or For Money?

I had an interesting meeting with a client this week who is older (74) and has a much younger wife (45). My client is very well off and I have done a lot of work for him in the past in regards to Estate Planning. This is his 2nd marriage as his first wife passed away several years ago. Most of our planning in the past was to be sure we set-up his estate in the best way to minimize the estate taxes and maximizes the inheritance for his kids and grandkids. This meeting was different as not only was he newly married, but his younger wife is not a U.S. Citizen (she is from Spain).

In a growing number of U.S. households one of the spouses is a Foreign National. This development underscores the need for planning professionals to be familiar with estate and wealth transfer strategies for the non-citizen spouse.

Every U.S. Resident – whether a citizen or not- is subject to federal estate taxes and the tax is imposed on the person’s world-wide assets. For this reason, non-citizen spouses need life insurance for many of the same reasons as their American spouses do.

Where the trick comes in, and what I explained to my client, is understanding the differences for a non-citizen spouse. For instance, where both spouses are citizens, assets can be transferred from one spouse to another without gift or estate taxes thanks to the “unlimited marital deduction.” But the unlimited marital deduction is not available for transfers to a non-citizen spouse – even if they are a permanent resident. The reason for this is the governments concern that a non-citizen may move back to her home country taking the gifts and inheritance with them. Once the money leaves the U.S. there is little chance for the U.S. to recover any taxes owed.

Some options for the non-citizen spouse include:

  • The non citizen spouse may become a U.S. citizen before filing the federal estate tax return
  • The deceased citizen’s estate can be transferred to a qualified domestic trust (QDOT) provided it is set up by the due date of the estate tax return (9 months after death or 15 months with an extension)
  • A cash strategy may be adopted to pay the decedant’s federal tax – a dollar for dollar option

For my client, and his much younger bride, the news was good. The planning could be simple since she was planning on becoming a U.S. Citizen anyway. She also had her own money and really was not interested in my clients money. They both wanted what was best for their children (she had two kids of her own). The realities of Estate Planning and the complication of using a QDOT were enough for her to start studying her American History since then they could use both of their martial deductions and truly maximize the transfer of wealth to their heirs.

For our other clients who are in this position it is good to understand what a QDOT is so you can help them understand and make choices for proper planning.

How The QDOT Works

  1. Federal Tax Law permits a marital deduction for assets transferred to a trust for the benefit of the non-citizen spouse
  2. If the trust qualifies as a QDOT under IRC2056(d)(2) then the QDOT can defer federal estate taxes inherited by the non-citizen spouse until the trust distributes its assets.
  3. Lets assume the total estate value is $20 million. If the U.S. Citizen dies first we can initially take advantage of the $5 million exemption and put the $5 million into the Credit Shelter Trust (CST).
  4. The balance – $15 million passes into the QDOT
  5. On the 1st death the federal estate tax is $0.
  6. While the non-citizen is alive, they may be entitled to discretionary distribution of trust principal and will have access to all income that comes from the QDOT
  7. On the 2nd death, the heirs receive the CST assets without any additional estate taxes.
  8. The assets in the QDOT will be subject to the QDOT tax – and the remainder will pass to the heirs.

Since there is still a tax on the QDOT assets – life insurance on the non-citizen spouse is still appropriate. In most cases a 2nd-to-die policy could work. For my client with the much younger spouse, we planned only for a policy on her since the cost was so low. In the end, I was convinced that my client was doing the right thing for his family and for his new wife. It was clear that they had married for love and that money had just come along for the ride.

For more information – call our offices for support @ 800-338-1892.

About Jeffrey Berson

40 years in and around the industry has made Insurance a part of my DNA. I have had the pleasure of working with and for some of the greatest minds in our industry. My "Bersonal" View is an attempt to capture some of the best ideas, the best concepts and the best practices in a way that can lead to success for others. It will certainly be my point of view, so please...don't take it "Bersonal".
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One Response to Did You Marry for Love or For Money?

  1. Chris Conrad says:

    That was very good Jeff, thanks!

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