There are a lot of misconceptions about whether people who are not U.S. citizens (either by birth or naturalization) can inherit assets from someone who has passed away. Californians who are citizens but are married to someone who hasn’t yet obtained their citizenship often put off their estate planning because of that misconception.
First, you should never procrastinate about estate planning because changes in your life in the future will necessitate changes in your estate plan. Many people modify their estate plan at least once, if not more, during their life. Modifying an estate plan doesn’t have to be that costly or complicated if it was well crafted at the beginning.
How a QDOT protects money from estate taxes
Obtaining U.S. citizenship can be a long, frustrating process. If your spouse is in that process, or maybe has no plans to become a U.S. citizen, you can still provide for them in your estate plan now. However, if your estate is going to be large enough to exceed the current federal estate tax exemption of $12.92 million, you’ll want to do so in a way that won’t leave them owing a portion of their inheritance in taxes should you pass away while they aren’t a citizen. That involves something called a qualified domestic trust (QDOT).
Surviving spouses who are U.S. citizens get a 100% marital exemption from any estate taxes However, non-citizen spouses don’t get that exemption – unless that money is in a QDOT.
A QDOT isn’t right for everyone
There are a couple of potential drawbacks to a QDOT. First, you would need to fund it while you’re still alive. The assets would remain “parked” there until you passed away. Further, while your spouse wouldn’t have to pay estate taxes on the assets if they leave any remaining assets in the trust to children or others when they die, those beneficiaries could owe estate taxes on it.
A QDOT is just one way of minimizing the tax burden on a large inheritance for a non-citizen spouse after your death, and it’s not right (or necessary) for everyone. It’s important to have experienced legal guidance to determine what the best option is for your specific circumstances and how to maximize the inheritance you’re able to leave.