The role of QDOTs for bi-national estate planning
There can be some great planning advantages in the case of a bi-national couple where one spouse is American. Opportunities often abound, for example, in choosing to own certain assets in either spouse’s name to optimise the tax implications for either US or UK purposes. For instance, the non-US spouse could take advantage of some of the UK tax-advantaged accounts and asset ownership structures in the UK that are generally not beneficial for a US person, whilst the US spouse could focus on utilising US tax-efficient vehicles.
In order to take advantage of some of those planning opportunities, one must also be aware of how the US gift and estate tax rules work. The US imposes a tax on transfers of property both during a person’s lifetime and at death. A US person has a current lifetime allowance of $5.49 million before being subject to estate or gift tax. Gifts given during one’s lifetime above the annual allowance will reduce an individual’s lifetime allowance.
Where a married couple are both US citizens they have the ability to pass assets freely between them without any implications. This is called the unlimited marital deduction. However, when one spouse is not a US citizen, the unlimited marital deduction does not apply. During one’s lifetime, gifts to a non-US citizen spouse carry a current annual exclusion of $149,000 before reducing the lifetime allowance. By taking advantage of the annual exclusion, one could gradually transfer wealth out of the US and, given a particular set of facts and circumstances, look at ways to optimise the structure of the family wealth without incurring gift tax and at the same time reduce the eventual taxable estate from a US perspective.
If proper planning is not put in place, any amount of an estate that is above the allowable lifetime exemption will likely be subject to federal estate tax. Aside from a surviving spouse making the decision to become a US citizen (which has other implications that must be considered), one could consider the option to set up a qualified domestic trust (also known as a QDOT). The QDOT could be created as part of a will and if the assets inherited by the non-US citizen spouse go into the QDOT any federal estate tax payable is deferred until the money is either distributed from the QDOT or the second spouse passes away. At that point, the deferred estate tax will be paid.
Whilst being a bi-national couple can present some challenges, through advance planning, one could avoid paying unnecessary costs and understand how to take advantage of some of the valuable opportunities that often present themselves.
For more wealth planning tips and tidbits from MASECO read our 39 Steps to Smart Living in the UK.
Risk Warnings and Important Information
The value of investments can fall as well as rise. You may not get back what you invest.
The above article does not take into account the specific goals or requirements of individual users. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy.
MASECO LLP trading as MASECO Private Wealth is authorised and regulated by the Financial Conduct Authority, the Financial Conduct Authority does not regulate tax advice. MASECO Private Wealth is not a tax specialist. We strongly recommend that every client seeks their own tax advice prior to acting on any of the strategies described in this document.