What If My Spouse Is Not a U.S. Citizen?

There is a great deal of speculation about estate taxes but given the current state of the economy, most people believe that Congress will not repeal estate taxes. The government needs the income from estate taxes. Therefore, you need to know certain rules that may pertain to you if your spouse is not a U.S. citizen.

First, if you or your spouse owns property (real estate or stocks or bonds) outside the United States, all of this property is included in your estate for tax purposes.

When you die, the amount you own in excess of the state estate tax limit ($675,000 in New Jersey) or the federal estate tax limit ($2,000,000 in 2008, going up to $3,500,000 in 2009) is subject to estate taxes. If your spouse is a U.S. citizen, you can give her/him everything you own, no matter how much that is, and you do not owe any estate tax. However, when your spouse then dies, everything he/she owned before plus what he/she inherited from you, is now subject to estate tax. It is different if one of you is not a U.S. citizen. Under those circumstances, any amount over $2,000,000 in 2008, or $3,500,000 in 2009, that is given to your non-citizen spouse is taxed at a tax rate of 45%. Why are foreign spouses treated differently? Because the government is concerned that your foreign spouse will take the money that is inherited from you and go back to her/his native land. And then you will never have paid taxes on your estate.

One way to solve the estate tax problem is for the non-citizen spouse to become a citizen. This can be done while you are both alive or even when you have already passed on.

If your spouse does not wish to become a U.S. citizen, then you can have a “Qualified Domestic Trust” (usually called a “QDOT”) created in your will. The money your spouse inherits from you is placed in a QDOT and estate taxes on your estate can be postponed. The QDOT must have a U.S. citizen trustee, the surviving spouse must be entitled to receive all of the income that the trust assets generate, and the QDOT must be established within 9 months of your death and must be elected on your estate tax return.

The QDOT assets are taxed when QDOT principal is withdrawn from the trust, when the trust does not conform to QDOT requirements, and when your spouse dies.

If you or your spouse are not U.S. citizens, it is important that you consult an estate planning lawyer right away. That is, unless you like giving your money to the government.

 

 

 

 

Gifts and Gift Tax

The federal tax code permits any person to give up to $12,000 per year to an unlimited number of persons without paying any gift tax or filing a gift tax return (did you even know there was such a thing as a gift tax and a gift tax return?). You can give to any people  you like – children, grandchildren, siblings, friends. If your spouse joins you in the gift, the two of you can give up to $24,000 to any person, without paying gift tax or filing a gift tax return. Giving away part of your estate is an old but effective strategy to save on estate taxes.

You can give money, stock, savings bonds, partial interests in real estate, or partial interests in your business. The recipient of your gift does not pay gift or income taxes on the gift. The annual gift that you are allowed to make must be completed by December 31 of each year. If you give a gift by check, the check must be deposited in the recipient’s account by the end of the year. If there are stock transfers, the transfer must be done by December 31^st. Since the transfer of stock as a gift is not considered a sale, you do not pay capital gains tax and the recipient doesn’t pay the capital gains tax until he/she sells. Your recipient takes your cost basis and your holding period. This means if you owned the stock for more than a year before you gave it to your son as a gift, your son now owns a long-term capital asset. And when he sells the stock you gave him, even if it is a month after you gave him the stock, he pays the long-term capital gains tax due.

If you want to give a gift of more than $12,000 to any one person, you can give away up to $1 million without being required to pay gift tax. If you give a gift over the $12,000 limit, you must report the amount of the gift on a gift-tax return (Form 709) which must be filed with your income-tax return.

Right now, with the stock market so battered, people are feeling the pinch and may not want to give any gifts. But the stock market will come back and every year that you do not decrease the size of your estate may be a lost opportunity to save on estate taxes. As of January 1, 2009, you can give an unlimited number of $13,000 gifts ($26,000 if your spouse joins in the gift).

The best guess is that the entire gift and estate tax scheme will be changing with the new Congress and President being sworn in next year. Although we cannot predict what they will do, the expectation is that estate taxes will go up and it may be harder to decrease the size of your estate to save on estate taxes. If you have a large estate, talk to your financial advisor and your lawyer to find out whether gift giving is right for you.

Business Planning

If you own a business, you probably took a lot of time and effort to plan it before you started the business (at least I hope you did). You probably thought about what kind of product or service you wanted to sell, from where you would provide it, how much to charge, and how to market yourself.

Have you ever thought of how you will exit from your business? It doesn’t happen overnight, not if you want to be successful at it.

You may be planning to sell your business – to your family, maybe a key employee, or a total stranger. Each scenario requires different planning to achieve the optimal outcome for you. If you want to sell your business to a family member, the dynamics of that relationship will filter through the planning and execution of the sale. You may want to wait to sell the business to your children until you are no longer able to work at all in the business. Frequently, I hear of children who are running their parents business, who are not sure that they will ever own the business, because the parents haven’t discussed their plans with the children. It becomes even more complicated if there are several children but only one actually works in the family business. Who gets ownership – the child who is now running the business or do they all share?

Are you aware that different strategies may create income tax issues for you or may create an estate that will cause you to pay estate tax?

It takes several years to plan your business exit strategy and to carry it out (maybe up to ten years). So start early. Make an appointment with your lawyer and your accountant and get everyone thinking about the best way to maximize what may be your biggest asset. This will allow for a better plan and a smoother transition.

If you have children who are interested in working in your business, involve them in some of the discussions. Listen to their wishes. But you do not have to give them what they want if it does not mesh with your wishes and plans. Remember, it is still your business. But be upfront about what you are doing. It is not fair to a child to have put significant time and energy into your business only to be told that you intend to sell to a third party who will have his own team.

If the business is to stay in the family, you must realistically assess which of your children are capable of managing the business. Management issues must be kept separate from ownership issues. A child can own a share of the business and never step foot inside its doors. If there are no children to take over the business, you must start looking at outsiders to buy your business.

Don’t let a crisis hit you before you plan your exit strategy. If you die or become disabled before you have a business succession plan, the results will be disastrous. Do it now and don’t do it alone. Call your lawyer and your accountant before it is too late to plan.