The Connecticut Elder Law Blog

A Different Set of Tax Rules for Non-U.S. Citizen Spouses

If you or your spouse is not a U.S. citizen then you need to be aware of the fact that you have a completely different set of estate tax rules to contend with.  And if you don't then you may end up sending a lot of your hard-earned dollars to the government unnecessarily.

When you have two spouses who are both U.S. citizens, then upon the death of the first spouse there is never any tax regardless of how large your estate is.  It's upon the death of the second spouse when estate tax can become an issue if the surviving spouse dies with an estate that exceeds the federal exemption amount (currently $2 million).

But...if one spouse is a U.S. citizen and one is not, and the U.S. citizen spouse dies first, then estate tax could become due at that point and the government is not going to wait until the death of the second spouse before collecting a tax.  Why not?  Because the government is worried about that foreign spouse high-tailing it back to his or her home country and dying there, in which case the U.S. government can't collect a single penny of estate tax.  So the government has decided to tax while the taxing is good...while that non U.S. citizen spouse is still here in the country.

So...if one of the spouses is not a U.S. citizen, then there is a unique estate planning issue that must be addressed.  In the next post I will go over the most common approach to this situation; a QDOT trust (yes, another one of those Q-acronyms that come up a lot in estate planning).

Beware of "Living Trust Mills"

I try my best to keep an ear to the estate planning blogosphere, and one of the more recent issues in the world of estate planning is the surfacing of "living trust mills".  The loose definition is an organization that markets revocable living trusts (usually by way of a lunch or dinner seminar at a nice restaurant) and tries to convince the public that living trusts are documents that virtually everyone needs and purposely misrepresents how estate tax and the probate courts operate in order to make living trusts more appealing.  The result is people (usually seniors) spending four-figure amounts on estate planning documents that they don't actually need.

The growth of these mills are evident in recent class action lawsuits initiated by clients who claim that they were misled when they purchased living trusts.  And Kudo's to Florida estate planning attorney, David M. Goldman for listing recent articles on these scams.   

I have posted on the danger that financial predators pose for our elderly population, but it's deeply saddening to learn how prevalent such predators have become in my own industry. 

I will throw my two cents into the blogosphere discussion by saying that there certainly are a lot of people who could benefit greatly from living trusts, specifically if the focus is avoiding the probate process.  But I would argue that they are not documents that everyone needs.  Perhaps these living trust marketers genuinely believe that living trusts should be as widespread as living wills. But I don't agree, particularly since trusts are much more expensive than wills and require much more leg-work in regards to re-titling assets into the name of the trust.  And I don't believe in counseling my clients to take on the added expense and hassle if they truly don't need to do so.

So...if you do attend one of those living trust seminars, I strongly recommend that you look into the background and experience of the presenters and be very wary of anyone claiming that there is a universal need for living trusts.

Your Will and Your "Stuff"

When I talk with clients about their wills, they almost always want to know how their estate planning should address their "stuff". The more refined, legal terminology for "stuff" is "tangible personal property". Things like collections, photo albums, clothing, furniture, the family coat-of-arms...they all fall into the "stuff" category. It's essentially any asset that isn't a financial item or real property. Just about everything else is your "stuff".

And don't take your stuff lightly! Any probate attorney will tell you that "stuff" often touches off very nasty legal proceedings. If you ask Judge Killian at the Hartford Probate Court about the case involving the family coat-of-arms that I mentioned in the above paragraph then you should be prepared to see his eyes roll around a great deal. So your stuff should be taken seriously in your estate planning.
If your stuff is genuinely valuable stuff which has significant financial value or will likely appreciate in value over time (like a fine painting or a baseball card collection) then it is something that will be considered part of your estate and the Probate Court will want to monitor its administration and distribution.

However, if an item has sentimental value but really no financial value (like a photo album or a family heirloom) then the Court typically prefers that the family handle its distribution outside of the probate process. This means that you are better off not mentioning it in the will and should direct its distribution with a letter or memo; something non-legal that is separate and apart from the will (attaching sticky notes with names on them to hidden spots on personal items is not unprecedented). This approach also makes it logistically easier to document any change-of-heart you may have in the future. In contrast, if you specifically mention it in the will then you need a very formal amendment process (an attorney to draft a codicil, witnesses, a notary, etc.) to make any changes.

But ( and this is an important "but") if you anticipate a family feud over any particular item, whether it's valuable or not, then specifically mention it in your will. There might still be a family feud over it, but the chances of your wishes actually being carried out go up substantially when they are in your will, which is witnessed and notarized.

One last tip: it's a somewhat morbid discussion, but you may want to consider having a family meeting to get some input from loved ones on how your stuff should be distributed. This may be the best way to avoid post-mortem court battles over your stuff.

Should Funeral Instructions Be In My Will?

Planning out a funeral certainly seems like a morbid task.  But the fact of the matter is that the act of planning out your funeral, whether it's done by you or someone else, is something that has to be done eventually (in light of the fact that death is one of the two things in life that are guaranteed).  So the funeral planning is one of the things that many of my forward-thinking cilents do.  And the question of whether the funeral instructions should be contained in the will often comes up.

As is usually the case with legal questions, the answer to this one is "yes, but...".  I usually encourage my clients to go ahead and talk about their funeral plans in their wills, assuming they have strong feelings on that topic, but you need to go beyond that. 

The problem is that when someone dies the will is often not even opened until sometime after the funeral.  You can imagine the loved ones' awkwardness when they discover that the funeral instructions in the will do not match up with what actually happened at the funeral. 

So, go ahead and include your funeral plans in your will, but you need to verbally indicate your wishes to your family as well.  You can even give them a document, separate and apart from the will, which spells out all of the funeral plans for them.  Setting up your funeral plans with the funeral home of your choice ahead of time also makes sense.  In other words, you should not rely on your will as being the sole source of funeral plan information for your family.

I will also mention that making funeral plans ahead of time, as morbid as that process may be, is almost always deeply appreciated by loved ones.  Having funeral plans in place removes a challenging administrative burden from your family as they go through an emotionally difficult time.

Can I Name a Trust as an IRA Beneficiary?

It wasn't too, too long ago when it was downright dangerous to name a trust as a beneficiary of an IRA.  As far as the rules were concerned, a trust could not have a life expectancy, and therefore all of the IRA funds would have to come out of the account and go to the trust within just 5 years of the death of the IRA owner.  All of the distributions during those 5 years were taxable as income and the wonderful benefits of potentially stretching out the tax liability over a much longer time period were lost. 

But suffice it to say that the rules have been changed...in a big way.  And although the rules changed back in 1997, I'm surprised at how many clients still have the "old rule" mentality a decade after the old rules were overhauled.

Nowadays, the tax deferral benefit is still available even if the IRA beneficiary is a trust and the life expectancy of the trust beneficiary is used to calculate the required minimum distributions each year.  If there are multiple trust beneficiaries, then the life expectancy of the oldest beneficiary is used.

However, the following requirements must be met:

1.  The trust is valid under state law (this is a relativley low hurdle to get over).

2.  The trust becomes irrevocable upon the death of the IRA owner.

3.  It's clear who the trust beneficiaries are.

4.  The IRA custodian (the financial institution managing the IRA) receives a copy of the trust by October 30th of the year immediately following the year in which the IRA owner dies.

Although the above requirements are not particularly onerous, it's always a good idea to chat with your financial planner, accountant and estate planning attorney before designating a trust as your IRA beneficiary to make sure you comply with all of the requirements.  They would also apprise you of any developments in the law that you will need to knwo about.  This is definitely not an area in which you want to make a mistake...the consequences could be very costly for your beneficiaries.

What If Someone In My Will Moves?

In most wills you will find that whenever a person is named in the document the name is usually followed by his/her town and state.  The purpose of this is to ensure that the Court and anyone else who reads the will does not confuse the named person with someone else. 

I like to take the "belts and suspenders" approach by listing each person's relationship to the client as well.  For instance, "I leave one share of my estate to my brother, Billy Bob, of Glastonbury, Connecticut".  Theoretically, there's no need to list Billy Bob's town and state since an indication that he is the client's brother dramatically narrows the field of possible people.  But I suppose I get a bit neurotic when I draft wills!

Anyway, this usually prompts the question of whether the client needs to amend his will if one of the people named in his will moves.  What if Billy Bob moves next door to Wethersfield after the will is signed?!

If someone in your will moves then there is absolutely no need to update your will.  And if your attorney tells you otherwise then he should probably be replaced. Just think about it... in today's mobile society each of your beneficiaries could change addresses several times before you die!  The will simply says that on the day that you signed the will, Billy Bob lived in Glastonbury and you can leave it at that.

The only possible reason why such a move would prompt a legitimate will amendment is if the move created an identification problem.  For instance, in the above example, suppose the client disinherited his other brother, also named Billy Bob (I don't think I've ever seen two brothers with the same name), out of his will, but then that brother moves to Glastonbury after the other Billy Bob moved from Glastonbury to Wethersfield.  Now the will seems to identify someone who the client didn't intend to include as a beneficiary of his will.

Please note that the above facts only tend to arise in law school exams, not real life.  Suffice it to say that address changes do not require will changes unless there are extraordinary circumstances.

Don't Mark Up Your Original Will!

I have too many clients who believe that if they want to change something in their will after they sign it then it would be fine to simply scribble their changes onto the original document.  It seems like an unmistakable way to communicate their intentions to their loved ones...and it saves them the cost of having to do a codicil.

Suffice it to say that this is a very bad idea that can leave a great deal of chaos for your probate estate and surviving family members.  By physically marking up the original document you run the risk of the local Probate Court deciding that the mark up's were an indication of your intention to revoke your will...not just amend it. 

Such a determination means that the directions contained in your will would be ignored and your estate would be distributed by the state's "laws of intestacy", which essentially means that the Connecticut legislature would decide how your estate is distributed. 

At the risk of sounding self-serving, I implore you to contact an estate planning attorney and formally execute a "codicil" (fancy word for "amendment" of "change") to your will to ensure that your wishes are followed.  Thanks to computer technology, wills can be changed very easily and for a very low cost.

Living Wills vs. "DNR's"

One thing many of my clients are often confused about is the distinction between "living wills" and "do not resuscitate orders" (DNR's).  Some clients balk at signing a living will because they believe that emergency medical personnel will not try to revive them if they have a heart attack.  So let's clear up the confusion...

Living wills basically say that if you ever find yourself in a permanent coma or vegetative state, and all the doctors agree that it is a truly hopeless situation, then the document indicates that life support systems will be removed, including nutrition and hydration (since they are essetnially life support systems).  Pain management medications would still be administered. 

DNR's are much different.  They essentially say that if you are having any type of a medical emergency (heart attack, stroke, etc.) then medical professionals are not allowed to try to revive you.  This type of order is usually put in place for very elderly and/or frail patients when pounding on their chest in an effort to administer CPR simply wouldn't make any sense.  In Connecticut, if you have a DNR in place then you typically wear a special bracelet so that emergency medical personel are aware of your DNR status. 

So...living wills become relevant in a very narrow set of circumstances (permanent coma) and just about everyone should have one, assuming that the instructions comport with your wishes, of course.  In stark contrast, a DNR becomes relevant in any type of medical emergency, but it is only appropriate for a very small percentage of the population. 

When Does My Estate Planning Need to Get Complicated?

The most complex aspect of estate planning is establishing a plan that will either minimize or eliminate any estate tax liability that would occur upon death.  But it's worth the effort since the estate tax is one of the steepest taxes on the books.

In the case of a married couple, as long as the surviving spouse inherits the estate of the dead spouse and he/she is a U.S. citizen then there is never any estate tax upon the death of the first spouse regardless of how large the estate is thanks to the "unlimited marital exemption" (obviously, there is no such tax advantage for a single decedent).  You could have a $10 billion estate, but there will be no tax due when one spouse dies. 

The estate tax concerns arise when the second spouse dies and has not re-married, or if both spouses die simultaneously.  If the size of the estate is over the $2 million mark, then the children will pay a whopping 45% federal estate tax on the overage!

This type of tax liability can be addressed in your wills or living trusts with complicated "AB Trust" or similar "credit shelter" planning (a good topic for a future post).

Please remember something that most of my clients forget or don't even realize: any proceeds on life insurance that you own are included in the calculation of your goss taxable estate!

Vital "Step #2" of the Living Trust Process

I've published posts on the overall scheme in regards to revocable living trusts (Part I and Part II), but the issue of funding your living trust is so important that it warrants a post of it's own.

It's essential to remember that setting up your living trust is a two-step process. Step #1 is having the document prepared and formally executing it.  Step #2 is funding it.  Too many clients complete Step #1 and think that the process is over when they are really only halfway done.  If you do not complete Step #2 then your estate will have to go through probate, which would obviously be a shame since the main reason for setting up a living trust is to avoid probate.

In regards to your real estate, your attorney should prepare a "quitclaim deed to trust" for you to sign which will transfer ownership of your real estate to your living trust, thereby funding the trust with your real estate.  This normally takes place at the same time that you execute the trust itself.

As far a bank and investments accounts go, you will usually just need to fill out and sign a one-page document.  Again, just like with the real estate, you are changing the title to the account so that the records of the financial institution indicate that your trust is now, technically, the owner of the account.

Please note that anything that has a designated beneficiary (life insurance, qualified retirement accounts, annuities, etc.) are already set up to avoid probate, regardless of whether you have a living trust.  But it is generally a good idea to name your trust as the beneficiary of these assets, especially if you are a married couple and your attorney has set up credit shelter planning in your trusts to address estate tax concerns or if you have set up trusts for children in your living trust.  Be sure to check with your attorney.  Again, remember that this would be a change of beneficiary, not a change of ownership.  Closing one of these accounts out and opening a new one in the name of your trust might trigger unnecessary penalties and taxes.