familyownedbusinessblog

Planning for non-US Citizen Spouse: You Can't Take IT With You

Planning for the non-US citizen spouse is necessary because there is no deferral of estate and inheritance tax at the death of the US citizen spouse. At the death of the US citizen spouse, any assets going to the surviving non-US citizen spouse subject to the marital deduction is fully taxable. It is only the marital deduction that is not extended to non-US citizen spouses. If and when the applicable credit returns in 2011 (expected to be $1,000,000), the credit does extend to such surviving spouses. It is the excess that will not be subject to the marital deduction for assets passing to a surviving non-US citizen spouse.  However, if the non-US citizen spouse becomes a naturalized citizen before the estate tax return (Form 706) is timely filed, the marital deduction will apply even though at the time of death the surviving spouse was not a US citizen.

Another technique is to create a qualified domestic trust which allows for a deferral of the estate tax. The requirements of such a trust are: 

1. It is a valid trust under state law;

2. At least one Trustee is a US citizen or domestic corporation;

3. The Trustee will collect and pay estate tax when distributions of principal are made;

4.  All of the income from the trust must be distributed to the surviving spouse;

5. An election as a qualified domestic trust is timely filed;

6. Trustee posts a bond or letter of credit where appropriate; and

7. Foreign real estate investments are limited.

If there was not qualifying trust created before death and the surviving spouse is unable to become a naturalized citizen in time, the surviving spouse may create a qualifying trust to which he/she makes an irrevocable assignment of the assets; or, petition the Court for a reformation of an existing trust to qualify.

Before going to the trouble of naturalize, court reformation, or irrevocable assignment, a non-US citizen spouse should do the numbers. What is the tax liability and are there adequate funds to pay the liability.  It may be better to pay the tax  and have complete use of the assets. One reason to consider paying the tax is that the qualifying trust only defers the estate tax. All of the tax will be paid on the principal subject to this trust. It will be collected and paid with each distribution of principal. The remainder, if any, will be paid at the death of the non-US citizen spouse. The rate of tax is that in existence at the time of death of the US citizen spouse.

Where a family business is one of the assets, deferral of the tax and paying in installments may be the better than having to sell off assets needed for the operations in order to pay the tax. But all options should be explored.

Manage Your Wealth Through Your Family Office

In order to maximize purchasing power and efficientcy, many wealthy families create family offices. These offices are business organized for the purpose of managing the assets of one or more families.  The first US family office was created by Thomas Mellon in 1868. Shortly afterward, John D. Rockefeller set up the Rockerfeller family office.  It's been estimated by the Family Office Exchange that there are 3500 family offices in the US.

In addition to asset management, family offices often provide education about investments and asset management; tax preparation; estate planning; banking; data management; charitable gifting; and, transition planning. There are more services the family office may provide such as trip planning, career counseling, and hiring providers of personal services.

In creating a family office,the family develops a mission statement that can be used as a measure for whether the office is being successful. The family will develop a family constitution that will govern the conduct of the family members in public, within the family and toward the staff in the office.

The family office will be staffed with non-family members who are paid. The services provided come at a cost as well.  For this reason, many wealthy families decide to join other families in a multi-family office (MFO) where the cost is shared but the services are those of a single family office (SFO).

Looking Into the Crystal Ball Darkly: Is Tax Repeal Good For You?

Because of the federal estate tax repeal for year 2010, people dying in 2010 may pass all of their estate to their loved ones without estate tax liability.  Repeal came with a shift of taxes from estate tax born by the decedent’s estate to the beneficiaries through income tax and capital gains tax because there is a limitation of the step-up basis at date of death and the spousal basis adjustment.  In some cases all of the estate will pass to the surviving spouse and in some cases all of the estate will go to the children. The difference will depend on whether there is a will or trust and its funding formula.

Most “non-taxable” estates (so characterized based on years up to and including 2009), will pass in 2010 to the surviving spouse or to the children, if there is no surviving spouse. In taxable estates (based on previous years), estate planners minimized the estate tax due by a formula which allocated to the family trust (also known as by-pass trust or credit shelter trust) the amount which could pass without federal estate tax (in 2009 that amount was $3,500,000). The excess amount was allocated by formula either outright to the surviving spouse (usually in first marriages) or to the marital trust (in a QTIP usually in second marriages).

If these tax sensitive wills and trusts were not amended to limit the allocation to the family trust, if death occurs in 2010 that will result in overfunding the family trust which could have the result of disinheriting the surviving spouse.  Even if there are sufficient assets and income for the use and benefit of the surviving spouse, overfunding the family trust will result in the loss of the $3.0 million spousal basis adjustment. 

Repeal of federal estate tax does not affect the estate/inheritance tax imposed by many states including Oregon ($1,000,000) and Washington ($2,000,000).  Those estates which exceed these amounts if death occurs in 2010 will pay estate tax on the excess to those states where there is an overfunded family trust.

What to do?  The first thing to do is to review your estate plan. Once you have done that, here is a list of other things to consider with your counsel:

1. Call your estate planning attorney to discuss the specifics of your situation. You may find everything is fine. Or you may be told that you have an overfunded family trust.
2. In the overfunded family trust situation, your attorney may advise you to amend your will or trust to limit the amount that is allocated to that trust for the year 2010.
3. To avoid the potential of losing the spousal basis adjustment, consider transferring assets from the wealthier spouse to the poorer spouse to “save” that adjustment.
4. To prepare for the possibility of paying state estate/inheritance tax, consider a 1 year term insurance for the expected tax liability. 

To emphasize, any action taken should be taken with the advice and assistance of competent estate planning counsel.  This is a very technical area of the law which requires the services of an expert.

Domestic Asset Protection Trusts Approved

In the December, 2009, issue of Estate Planning,  Howard M. Zaritsky report on the Internal Revenue Service (IRS) Ltr Rul 2009-44002 in which the IRS confirmed that asset protection trusts in states where these techniques are approved and  when properly drafted will achieve the desired estate and gift tax results. These self-settled, spendthrift trust are sanctioned in several states including Alaska and Delaware will not be included in the grantor's estate nor be a gift upon creation according to this private letter ruling.

To be an asset protection trust, the trust is irrevocable and must be subject to one of the jurisdictions that prohibit a creditor from reaching the assets held in a self-settled trust unless the grantor intends to defraud the creditor by creating the trust; or, the debtor is a current debtor at the time of creation; or, the grantor can require the trustee distribute income and/or principal to the grantor.

While there is no case law affirming these domestic asset protection trusts, there is now guidance on the position of the IRS as to the estate and gift tax treatment of these trusts. This should provide more comfort to lawyers and their clients using this technique of asset protection.