Estate Taxes Can Take a Huge Bite When Spouse Isn’t a U.S. Citizen
Jim Genden has a simple wish. He wants to leave all his money to his wife of 27 years when he dies without Uncle Sam taking such a big bite in estate taxes that it affects her lifestyle.
Normally, this wouldn’t be a problem. Husbands and wives usually have the right to leave all their money to a surviving spouse without paying estate taxes.
But Genden’s wife, Alma Koppedraijer, isn’t a U.S. citizen, so she’s subject to a different set of rules. If Koppedraijer dies first, her assets can go to Genden tax-free. But if Genden dies first, he can leave just $675,000 to Koppedraijer before estate taxes kick in. These taxes can eat up as much as 55% of a bequest.
“The current estate tax law puts an enormous discriminatory burden on families where one spouse is not a citizen,” Genden says.
Estate tax rules work this way because Congress considers the marital exclusion, which allows all assets to be transferred tax-free to a surviving spouse, to be a tax deferral, not a method of avoiding estate taxes permanently. When the second spouse dies, the estate tax is due and payable on any amount above the $675,000 exemption.
However, Congress envisioned that a noncitizen might leave the country with his or her bequest, avoiding estate tax altogether. Hence the special rules.
There are ways to eliminate or reduce estate taxes after the death of the citizen spouse, but they’re “not very palatable,” Genden says.
The simplest solution would be for Koppedraijer to become a citizen. But Koppedraijer, who is Dutch but has lived in the U.S. for two decades, is not willing to make that change.
Many people who emigrate to the U.S. as adults feel the same way, says Charles P. Rettig, partner at the Beverly Hills law firm of Hochman, Salkin, Rettig, Toscher & Perez. They often consider it disloyal to their homeland and their families to give up their original citizenship.
The alternative, unfortunately, requires more complicated estate planning. The couple can set up a special type of trust, called a qualified domestic trust, or QDOT. That saves a surviving noncitizen spouse from paying estate taxes, but gives only limited access to the bequest. The noncitizen spouse can take interest income but not principal out of the trust. If any principal is withdrawn from the trust, estate taxes become due immediately on that amount, Rettig says.
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The main difference between a QDOT and any other trust used for estate planning is that it requires the successor trustee--the person who takes control of the assets after the death of the citizen spouse--to be a U.S. citizen. This trustee also must be willing to be personally liable for any tax that’s due as the result of distributing principal to the noncitizen spouse.
If Genden and Koppedraijer had children, this provision might not be a problem. Their children probably would be citizens and willing to be liable for the tax.
But the Chicago couple don’t have children, so Genden figures they’d have to hire a professional trustee, whose annual fees could further whittle away their joint assets.
The other option is for Genden to systematically divest himself of assets by giving annual gifts to his wife. Because of special rules for situations like Genden’s, he can give Koppedraijer a bit more than $100,000 a year without paying estate or gift taxes. (Nontaxable gifts to anyone other than a noncitizen spouse are limited to $10,000 annually.)
But that’s not a great option either, Genden notes.
Any assets held in joint tenancy are considered to be the property of the person who dies first. Moreover, individuals can’t transfer assets held in individual retirement accounts and pensions, nor can they transfer ownership of employer-provided life insurance benefits. Those assets must remain in Genden’s estate.
As a result, Genden would have to “gift” virtually all of his other assets--such as the couple’s non-retirement investments, personal property such as automobiles and even his pay--to his wife to stay below the estate tax threshold.
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That creates a logistical challenge. Theoretically, the moment Genden gets a paycheck, he would have to transfer it to Koppedraijer to keep it free of estate tax in the event that he dies while driving home from work.
“Since I love and trust my wife, I am willing to entrust her with our assets,” he says. “But we have to constantly watch where money is deposited” to make sure it’s not in joint tenancy.
Genden and Koppedraijer, who are in their early 50s, are banking that Congress will change the rules before it becomes an issue for them.
Congress proposed last year to eliminate estate taxes, which would solve the problem for Genden and Koppedraijer. But the bill did not become law. In the meantime, Genden writes letters to members of Congress and journalists in the hope that somebody will listen.
What irks him most is that he’s not averse to paying estate taxes. Because they have no direct heirs, the couple plan to leave the bulk of their estate to charity. Genden’s only interest is in ensuring that his wife’s lifestyle isn’t affected by estate taxes at his death.
“If American law says that when my wife dies she’ll owe tax on everything she inherits from me, neither of us would object to that,” he says.
“But to do it when one spouse is alive necessitates this incredible planning superstructure. It just seems like we should be able to do this without going to all this trouble and expense.”
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Times staff writer Kathy M. Kristof, author of “Investing 101” (Bloomberg, 2000), welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes.com. For past Personal Finance columns, visit The Times’ Web site at https://www.latimes.com/perfin.
