Estate planning with a non-US Citizen spouse (aka what is a QDOT?)… | Estate Planning Daily 034

Hey everybody, welcome to another episode of Estate Planning TV. I am Christopher Small. I’m the owner of CMS Law Firm. I’m your host and this is the internet’s most passionate show about estate planning.

We are also, by the way, going live right now on my Facebook page. If you have not like my Facebook page, you’re going to want to do that. Go to Facebook and search for CMS Law Firm. It’ll pop up, like the page. I do a video every day. We talk about basic estate planning, we talk about complicators to state planning, we talk about legacy, wealth, all kinds of other stuff, okay. So, if you’re watching this later, like the page.

So, today, we’re going to talk about non-U.S. citizen spouse estate planning and specifically we’re going to talk about what to do if you as a couple are over the Washington State estate tax threshold.

For the purposes of this discussion, we’re going to assume that the Washington State estate tax exemption amount is $2.5 million. That’s not exactly right, it’s like 2.4 and change but to make the math easy, to make my brain not explode, we’re going to use $2.5 million before you have to start paying Washington State estate taxes.

We are not talking about federal estate taxes because those start at $11 million. But the concept that I’m going to talk about works in much the same way.

So, before I even get there though, one more sort of disclaimer, word of caution, whatever you want to say, if you are married and you are a U.S. citizen or you are not a U.S. citizen and your spouse is a U.S. citizen, basically, if one of you is a U.S. citizen and one of you is not this is an important video to watch and you’re also going to want to make sure that you schedule a time to talk with me or with somebody before you actually do some estate planning.

This is not a do-it-yourself type of plan that I’m going to talk about. The purpose here is to educate you so you know what’s going on and what you are potentially giving up if you nothing or you do your own.

All right, so hit the button, cmslawfirm.com/strategysession, click the link in the thing, whatever. You have many, many options but please, please talk to somebody before you do anything because it can literally cost you a lot of money.

So, let’s get started. By the way, we’ve already talked about the Washington State estate tax exemption starts at $2.5 million. What that basically means is that, well, it’s about to get weird. So, I’m sorry and I’m going to try to do this on camera and I have a trusty white board right here that I’m going to go like this to, whoop, whenever I mean to show you something that I’m talking about.

To start with, to begin with, if you are married and your Washington State estate tax exemption is $2.5 million per person, for this exercise, you still need to do some trust planning if you want to be able to use both spouses’ exemptions. If you don’t do any planning, when the first spouse dies, assuming everything goes to the surviving spouse, when that spouse dies, the tax is going to start at $2.5 million.

You can do some trust planning to double that. Basically, what happens is, and you’ll see it here more in depth by the way in a minute, it’ll just be a little bit different because there’s a non-U.S. citizen spouse involved, but what you basically do is when the first spouse dies you have a trust. You have a trust that exists when everybody’s here. When the first spouse dies, the amount of their Washington State estate tax exemption is sort of like put over here and a new separate trust is created right here. Bam.

This trust over here is called the decedents trust, the D trust. Let’s call it the D trust to make it easy. The D trust holds up to $2.5 million. The surviving spouse who is still alive can access the D trust. They can use everything in the D trust if they need to but when the surviving spouse dies, everything in this D trust is not determined or does not count as part of the surviving spouse’s estate, which means you can basically double your estate tax exemption. You got $2.5 million over here that doesn’t count as part of the surviving spouse’s estate. You got $2.5 million over here that is the surviving spouse’s estate. Now we’re at 5 million bucks instead of 2 million bucks. Basically, saves you, I mean, these are rough numbers, $275,000.

Now, with that being said, if you are married and one of you is not a U.S. citizen, you’re going to do a very similar sort of a trust set up with some additional important differences.

And these are really important to know because if you don’t do them right then you could be owing some money when the first spouse dies. So, let’s get started. Hold on, let me get a drink. We’re live. It doesn’t matter. By the way, the Eldridge Hotel is in Lawrence, Kansas. Shout out to my Jayhawks. Right there, okay.

So, what we’re going to start with is this, married. I’m making notes right now. I apologize for the thing shaking. Spouse one equals U.S. Spouse, two equals non-U.S. Estate equals $6 million. This is what we’re starting with, okay? Oh, it’s backwards. Dang it. All right, this is going to be interesting. Reverse this in your mind. You’ll get the gist of it as I show you. So, it’s easy to do like this, which is six million. I could always just try to do this backwards. That would be interesting. Six million. I wouldn’t even know how to do that.

But I wonder if we can. No, we can’t do that because they need to see. So, six million. So, now, the first event that happens is the first spouse dies, the U.S. citizen spouse dies. When that happens, like I said, first of all, what you’re going to do is you’re going to take all of their assets, $3 million, boom, and you’re going to move it over here. And Washington State is a community property state so basically everything that’s accumulated after you’re married, with some exceptions, we’re not going to talk about those, is owned 50% by one spouse and 50% by the other spouse. So, if we have a $6 million estate and one spouse dies, technically they have a 50% stake in that or $3 million. If our Washington State estate tax exemption is $2.5 million, we’re going to have an extra $500,000 that we have to deal with. Remember that, we’ll get to that in a minute.

So, first of all, what we’re going to do is this. Okay, so, SP1 dies and we’re going to have 3 million go in this direction. Now, again, I don’t even know why I’m showing you this anymore because it’s all backwards but I might as well show it to you. All right, so you have 3 million going over.

Now, we’ve created this trust structure where $2.5 million or the Washington State estate tax exemption is going to go into this D trust, the decedents trust.

So I’m going to draw another circle here. We’re going to put $2.5 million in. There’s no tax on this one. And this is where you’ll see the differences. Anyone can be the trustee of this trust, of the D trust. You’re going to see how this gets important if you have a non-U.S. citizen spouse. You can’t even read that. I’m going to keep showing them to you though just because.

So, you’ve got $2.5 million that goes into this D trust. You’ve got this extra $500,000 that’s left over. Normally, if you have two U.S. citizen spouses, what you would do is you would just put this into what’s called a marital trust, which is basically just another trust that the surviving spouse gets to utilize and becomes part of their estate. And then they die it just counts because there is an unlimited marital deduction, which means anything that you give your spouse, you can give them $100 million, if you are both U.S. citizens you’re not paying any tax on that until the surviving spouse dies. And then you could spend that all the way down, not paying any tax on it. That’s how it goes. However, when you have a non-U.S. citizen spouse and they are the surviving spouse, the money that’s extra, that 500K that’s extra from the decedents spouse’s estate is going to have pay tax.

There is not an unlimited exemption from spouse to spouse for non-U.S. citizen spouses. Hopefully, that made sense. I can’t see you or hear you so I’m going to have to guess that you did.

Now, there is a way, however, to defer the tax that’s owed on that $500,000, which for Washington State estate tax purposes, would be roughly $50,000. Not important but it’d be nice if you don’t have to pay that until the surviving spouse dies. So, the way that you do that is to create what’s called a qualified domestic trust. What’s up, Dale? Thanks for watching. Okay, a QDOT trust is what this thing is called, all right. It’s set up specifically for this area that we’re talking about. What happens, in that instance, is this extra 500K is put into what is essentially a marital trust. There is going to be tax on it owed when the surviving spouse dies.

And the surviving spouse can have access to those trust assets while they’re alive. They can have access to all of it. However, here’s the big caveat. Normally, in a two U.S. citizen situation, the spouse could be sole trustee of the trust but when you have a non-U.S. citizen spouse, that is not the case, all right.

So, what’s going to happen with this 500K, which is called a marital trust or the QDOT really is what it’s called in this instance, the trustee can be the wife or the surviving spouse. The guy always dies first in my scenarios by the way. So, the trustee can be the surviving spouse but you also have to have a U.S. citizen co-trustee. If you do not and you cannot appoint one or you do not appoint one in time, you have to pay estate taxes at the death of the first spouse.

Now, if you do have a U.S. citizen that’s appointed to be the co-trustee of this QDOT trust, then any tax that’s owed is deferred until the surviving spouse dies, which could be a really, really long time depending on the scenarios.

Why do they do this? Why do they require a U.S. citizen to be a trustee of this QDOT trust? It’s quite simple really. It boils down to one thing.

Hold on. Hopefully, you can see this. See that? Oh, those are backwards money signs. It comes down to money.

The government wants to make sure that they get their money. They have found that one of the only ways to do this is to have a U.S. citizen to be appointed to be co-trustee of this trust. That way if anything goes sideways they’ve got somebody that they can come after and make sure that everything gets paid. So, at this time also, the 3 million from the surviving spouse is going to go over here into what’s called the survivor’s trust. This is a revocable trust. Nothing important to see over here. It’s kind of just like your regular old trust, it will just go the job that it needs to do.

The surviving spouse can change the terms of that trust. They can move property in and out of the trust. They can destroy the trust. They can do whatever they want because they’re in charge.

But the moral of the story is, the important thing to remember, the key, is if you are a U.S. citizen and you are married to a non-U.S. citizen or vice versa you want to talk to an estate planning attorney to just make sure that you don’t need to set this up or learn about this so you can decide that you do or do not want to set it up knowing what the consequences are, what the benefits are and all that kind of stuff, right? Because the only decision that you can make in estate planning, the best decision, it’s not the only decision, the best decision that you can make is an informed decision.

Just trying to teach you so you can make choices knowing what the ups and the downs are and then you can make your choice from there.

All right, so, that’s it. That’s all we got.

Now, if you have questions after you watch this video, please leave a comment below. If you’re watching this on YouTube, leave a comment below. If you like this video, hit the like button. If you know someone that needs to watch this video, if you know someone that is a non-U.S. citizen, share this video with them because it’s important.

It can save them many, many thousands of dollars, at least.

All right, and if you are watching this video at any time and you do want to talk more about this, hit the button, click the link. I don’t know if there is a button. Go to cmslawfirm.com/strategysession.

All right, that is it. Wrapping up another episode of Estate Planning TV. Once again, I’m your host, Christopher Small. I’m the owner of CMS Law Firm. We do estate planning, we do probate, we do it well. We would love to help you if you want it. Click the link. Come and talk to me for free.

I will give you the lowdown, talk to you about your specific situation and see if we’re a good fit.

All right, that’s it. Have a great day and I will talk to you again tomorrow. Bye.