I am a United States citizen, but my spouse is not. Are there special requirements we need to incorporate in our estate plan or last will and testaments?
Most definitely yes. Part of a married couple’s estate plan may include utilizing what is called marital deduction in the estate of the first spouse to die — in order to avoid paying any estate taxes until after both spouses are deceased. This is particularly true if each or either spouse has a gross estate more than the estate tax threshold, currently at $5.43 million for federal taxes and $3,125,000 in New York (for 2015). This exemption is only permitted when the surviving spouse is a U.S. citizen.
When a surviving spouse is not a U.S. citizen, the estate tax for assets exceeding the estate tax exemption would ordinarily be due. Perhaps recognizing the inherent problem in depriving the surviving spouse from the use of assets to support herself during her lifetime, the IRS allows non-citizen spouses to choose to put assets in excess of the exemption into a special type of trust, called a Qualified Domestic Trust. This allows the surviving spouse to enjoy the benefit of the marital deduction, while giving comfort to the IRS that the government will receive the taxes due on the death of the second spouse (rather than have the surviving spouse “abscond” to the home country and deprive the U.S. government of the tax on the remaining assets).
In light of the increase in the allowable exemption, fewer non-U.S. citizen couples find themselves in a situation that would require a Qualified Domestic Trust to preserve assets after the death of the first spouse.
In addition if your estate does not quite reach the federal limit, but does exceed the New York State limit, there is no need to set up a Qualified Domestic Trust in order to take advantage of the marital deduction provisions.
Another key point to be mindful of is that U.S. domiciliaries (even if they are non-U.S. citizens), remain subject to U.S. gift and estate tax on their worldwide assets. Non-domiciliaries are only subject to the U.S. transfer tax system only to the extent of their U.S. property. Many international clients think they are “safe” if they don’t declare the assets. This is a mistake, as the IRS could charge interest and penalties and also lien the assets located in the U.S.
Although “domicile” is a very fact-intensive inquiry and analysis, that very much depends on the circumstances, a foreign national is considered “domiciled” in the U.S. if he is currently residing in the U.S. with no intention of leaving. Or, stated another way, if the evidence indicates that the U.S. is the place to which the person intends to return when they are away.
The prudent ex-pat will enlist the services of an accountant and attorney to ensure that they are positioned in the most efficient manner both for income and estate taxes. A U.S. will, with or without a Qualified Domestic Trust, can be a crucial part of ensuring efficient disposition of assets in the most tax-efficient manner possible.
In addition, there are important considerations for ex-pats who have children during their residence in the U.S. There are two circumstances to consider: what would happen to the care and raising of minor children if both parents were to die, but also if both parents become disabled while the child(ren) are minors? Frequently, the choice of guardian by a non-U.S. citizen in his Will is a family member who lives in the home country and is not a U.S. citizen. In that case, a designation of stand-by guardian is crucial to help bridge the gap between the time that the parent(s) are incapacitated or have died, up until a court has made a determination of a permanent guardian. The U.S. will also helps determine the guardianship of your children upon death of both spouses, rather than leaving it up to the full discretion of the U.S. court.
The procedure to name a guardian for minor children is to nominate an individual or individuals in your will to take legal custody of your child. This can but does not need to be the same individual(s) as the “minor’s trustee,” who will oversee the management of any finances left to the minor child.
A guardian nomination is just that: a suggestion to the court that, in most cases, will be upheld if the individual qualifies as a fiduciary, meaning a person in a position of trust. In New York a person is not eligible to be a fiduciary if he is a “non-domiciliary alien […] except [….] one who shall serve with one or more co-fiduciaries, at least one of whom is resident in this state.” That said, the court may still appoint a non-domiciliary alien or a New York resident as a fiduciary in his or her discretion. An individual who is mentally incompetent, a felon, or who otherwise “does not possess the qualifications required of a fiduciary by reason of substance abuse, dishonesty, improvidence, want of understanding, or who is otherwise unfit for the execution of the office” is also unfit to serve as a fiduciary, as is anyone else who is ineligible in the court’s discretion. The court may also declare as ineligible to act as a fiduciary “a person unable to read and write the English language.”
What does this mean? For international clients, it means that while they should nominate the guardian of their choice based on substance (i.e., their true qualifications in substance to provide the best care for their children), the choice is a mere nomination and is subject to the judge’s approval and order of who will raise a child and have legal custody. Second, for the many ex-patriates living in New York City, it means that extra care must be taken to communicate to the court why the appointment of a non-domiciliary individual as guardian is in the best interest of your minor children. These specifics can be spelled out in the will itself or in a separate writing that should be properly executed.
The other thing to consider is that many non-U.S. citizen parents reside in the U.S. with no real intention to leave, but are insistent that their children be raised in their home country. The thing they fail to consider is that a child who is raised in the U.S. his entire life may not want to leave the U.S. when he is 10, 14, 15, and his entire life is based here. It is a very different situation when the child is an infant or toddler and could easily adjust. If a parent wants the child to be repatriated to the home country, the child’s citizenship may be a factor bearing on the judge’s decision. If the parent applied for or obtained dual-citizenship from her home country for the child, this may be deemed evidence by the judge of the parents’ intent for their child to keep a connection to the parents’ country of origin. It has the added impact of providing a basis for which the guardian in the home country can request assistance from her own state department or diplomatic agency to repatriate the child. In the absence of dual citizenship, the home country’s state department lacks standing to assist. This, together with basic border-control issues, poses an obstruction to relocating a child to another country either temporarily pending the proceeding or permanently.
Because estate tax laws constantly change, it is important to revisit your estate plan as set up in your last will and testament over time. If either or both of you are not U.S. citizens, it is important to discuss with your estate planning attorney the possibility of including a Qualified Domestic Trust in your wills.
Alison Arden Besunder is the founding attorney of the law firm of Arden Besunder P.C., where she assists new and not-so-new parents with their estate planning needs. Her firm assists clients in Manhattan, Brooklyn, Queens, Nassau, and Suffolk Counties. You can find Alison Besunder on Twitter @estatetrustplan and on her website at www.besun