Monday, September 23, 2019
Often times a couple can come in for a basic consultation that seems simple, but then a situation arises that has serious tax repercussions. For Sean Wilson, a senior director in the product and portfolio solutions and distribution area of TIAA Wealth Management in New York, one such couple dealt with a husband that was an American citizen while the wife was a French citizen.
Married couples that are both US citizens get to enjoy the benefit of the unlimited marital deduction, while a couple that has parties of different citizenships do not. Well, the American spouse can receive gifts from their spouse without fear of paying gift or estate taxes, but the noncitizen cannot. For those married to noncitizens, the maximum amount they can gift to their spouse tax-free each year is limited; in 2019 the cutoff is $155,000 and any gifts in excess of that require filing a gift tax return. At the death of the citizen spouse, estate taxes may come in to play. Because the noncitizen spouse does not qualify for the unlimited marital deduction, any amount that is over the federal exemption amount would be subject to federal estate tax.
Not all hope is lost, however, as there are some options to save a multi-citizenship couple from suffering from estate taxes. One is an irrevocable life insurance trust (ILIT), a type of living trust that's designed to hold a life insurance policy. The trust would be named the beneficiary, with the noncitizen spouse as the beneficiary of the trust, and the assets in the trust are not taxable. The other option is a qualified domestic trust (QDOT), a special kind of trust that allows surviving noncitizen spouses to take the full marital deduction on estate taxes. One trustee must be an American citizen or qualified domestic corporation.
See Ben Mattlin, For Noncitizen Spouses, Beware Estate and Gift Taxes, Financial Advisor, September 19, 2019.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.