Planning for Non-Citizen Spouses in Large Estates

Planning for Non-Citizen Spouses in Large Estates

By Alan G. Orlowsky

A married couple has special Estate Planning challenges if one spouse is not a citizen of the United States. Federal estate tax law requires that a spouse be a U.S. citizen in order to qualify for the unlimited marital deduction. The primary reason for this law is that the IRS does not want a surviving non-citizen spouse to leave the United States with property that has never been taxed.

The citizen spouse’s estate still has the individual estate tax exemption or applicable exclusion amount ($5,250,000 for 2013), and even though the surviving spouse is not a U.S. citizen there is no federal estate tax on this amount. The problem comes for married couples with large estates that exceed the applicable exclusion amount. The estate of the citizen spouse will have to pay federal estate taxes on everything over that exemption amount unless the surviving non-citizen spouse becomes a citizen before the deceased spouse’s estate tax return is filed, or if the non-citizen spouse is the beneficiary of a special trust called a Qualified Domestic Trust (QDOT).

A QDOT allows the deceased spouse’s estate to postpone paying federal estate tax if the trust meets certain requirements. With a QDOT, at the first spouse’s death, assets go to the trust instead of to the surviving non-citizen spouse, and the spouse can receive income distributions. When the surviving non-citizen spouse dies, the assets in the trust pass to other beneficiaries named in the trust document such as the couple’s children. That is when the estate tax is paid, as if the assets were in the estate of the first spouse to die, not as part of the second spouse’s estate.

In order for a QDOT to work, specific rules must be followed. For example, the trustee who controls the trust must be a U.S. citizen. If trust assets exceed $2,000,000 (very likely in the large estate situation we’re describing), the trustee has to be a U.S. bank or domestic corporation willing to be bonded for most of the value of the trust. The executor of the deceased spouse’s will, or trustee of his or her trust, must make an election on the deceased spouse’s estate tax return to have the trust treated as a QDOT.

 As mentioned, the non-citizen spouse is entitled to distributions of income earned by trust assets, and although the distributions are subject to income tax, they are exempt from estate tax. However, distributions from trust principal to the non-citizen surviving spouse are not allowed – unless the U.S. trustee is given the right to withhold estate taxes on any distributions of principal.

There are also exceptions to the taxation of principal distributions if those distributions fall under the IRS hardship exemption. If the spouse has an “immediate and substantial” need for money relating to “health, maintenance, education or support”—either his own, or that of someone he legally obligated to support—a distribution of trust funds may qualify for a hardship exemption. However, the non-citizen surviving spouse would have to prove that he or she doesn’t have other available assets to meet those needs. 

If you have any questions about planning for Non-Citizen Spouses and how we can help please contact the Law Office of Orlowsky & Wilson by calling 847-325-5559 or visit our website www.orlowskywilson.com for more information. 

Baby Boomers: Do Your Parents Have an Estate Plan?

Let's Talk about.......Baby Boomers: Do your parents have an Estate Plan?
By Alan Orlowsky

Baby Boomer Joe McGill (not his real name) loved his parents, and when they died, Joe and his sister grieved. The fact that his parents left their estate in a chaotic mess didn't diminish Joe's affection for them, but it did cost him and his sister hundred of thousands of dollars in estate tax and legal fees, plus many hours of administrative hassles. Since their mother's will was confusing, Joe and his sister feuded when deciding which of them would keep their mother's collection of antique sculptures. Joe wanted to keep it intact rather than divide and his sister only wanted certain pieces.

The taxes and fees were paid by the estate, to be sure. The problem was the if older McGills had planned their estates wisely, their children - not the IRS and the lawyers - would have inherited that money.

Estate Planning not only preserves wealth for succeeding generations,it also gives the aging parents satisfaction and peace of mine. If they really think about it, most parents would rather leave behind a grand legacy than a costly mess - not to mention help their children and grandchildren achieve their dreams and goals.


Let's talk about what a good estate plan consist of, and then suggest strategies for raising the subject of estate planning with your parents if they normally avoid talking about their financial situation with you.

What's in a good estate plan?

Each of your parents (in fact, every parent and person with substantial assets) should have a solid estate plan. At the very least, such a plan includes a will, durable power of attorney for property and a power of attorney for health care. Affluent parents should use revocable trusts to keep trust assets our of probate - which in IL can take months or years to resolve.

Depending on the value of the estate, the nature of the assets and the family relationships, a plan might also include a life insurance policy and irrevocable life-insurance trust, or a generating skipping gift trust, for example. Irrevocable trusts which we have talked about in this blog, help protect assets from estate tax.

If your parents have trusts, each year they should transfer new probate assets to their trusts. Probable assets include, cash, stocks and bonds, limited partnership shares, valuables and collectibles.

A Estate Plan should also involve life insurance to provide estate liquidity, if a substantial portion of the estate comprises liquid business interests or real estate.

Each Parent should appoint a competent and reliable executor (in the will), trustee (for a trusts) and agents (for powers of attorney). Those designations will need to be reviewed and modified if any of those people become disabled, or deceased.

Raising the Subject

In many families, especially in your parents generation, talking about your personal finances can be very difficult. Some parents don't feel comfortable telling their adult children how much money they have and what's going to happen to their wealth when they die. In some families, if adult children ask their aging parents about their assets, wills, trusts,beneficiaries or heirs the parents might suspect their children of having purely selfish motives. If the children raise the subject of powers of attorney, the parents might wonder if their kids are trying to take control of their property. They also might feel a little wary or suspicious if you advise them to give you and your spouse and your children $12,000 each, this year and every year.

Before you raise these issues with your parents, discuss them with your siblings, so when you do speak about this you present a unified, concerted message. Then you can either approach them as a team, or approach them alone, acting as the quarterback with their consent.

The best way to raise the subject of money, death and taxes with your parents who don't normally discuss those topics with you is to over the course of several visits ask them questions about their lives, their ancestors and your family history. Ask them how they hope to live out the rest of their lives, their dreams and goals, their worries and concerns, how they would like to be remembered, what would they like their grandchildren to remember about them and what family values would they like you to preserve.

If you are sincerer and truly interested in the answers, you will provide your parents with a sense of continuity and heritage. This will also build trust and open up an avenue for talking about sensitive issues like money, estate planning, their health and welfare and any other personal concerns that your parents were previously reluctant to reveal.

 If all fails, you might suggest they talk to their legal and financials advisers about their future - including their financial security, estate plan, long-term health care and future residential options.


There is no shame in wishing to preserve your parents wealth for the sake of your children and future generations.

If you have questions about this post or about a particular legal situation, please contact Alan Orlowsky by calling 847-325-5559.