By: Jim Dossey, MS, MBA, JD -
Liam Neeson is an Irish actor that has had a number of successful films, including Schindler's List, Star Wars Episode I: The Phantom Menace, Taken, Michael Collins, Batman Begins, Kinsey, Clash of the Titans, and The Chronicles of Narnia. After Liam Neeson's wife, Natasha Richardson, passed away on March 18, 2009, he became an American citizen. Neeson noted in an interview with the New York Daily News that the outpouring of support that he received was partly the reason he decided to make this change. But what was most likely the main reason? Estate Tax…
The current U.S. estate tax system has two major exemptions. First, everyone is entitled to a unified credit, aka the estate tax exemption. In 2009, the estate tax exemption was $3.5 Million; in 2014, the estate tax exemption is approximately $5.3 Million. The second major exemption is the "marital deduction". Under the marital deduction, a spouse can pass an unlimited amount to a surviving spouse tax free.
The problem for Neeson, however, is that the marital deduction only applies to US citizens. Therefore, if a decedent passes an amount greater than the estate tax exemption to a surving spouse, the estate will incur estate tax. For example, if Natasha Richardson's estate was valued at $10MM in 2009, Neeson would have had to pay estate tax on $6.5MM. In this example, the tax would be about $2.6 MM (40% of 6.5MM).
To get around this issue, spouses have two options. First, a US citizen spouse can create a special trust in their Will called a Qualifying Domestic Trust (QDOT). If the Will has a QDOT, the amount of assets exceeding the estate tax exemption is given to the QDOT rather than to the non-citizen spouse directly. If the citizen spouse does not have a Will with a QDOT, this option is not available.
The second option for a non-citizen spouse is to become a US citizen before they have to file an estate tax return. If the surviving spouse becomes a US citizen, they are entitled to the marital deduction and would incur no tax liability. Although we can't be certain that this was Neeson's reason to become a US citizen, the timing of his citizenship seems telling. In August 2009, six months after his wife's death, Neeson noted on Good Morning America that he had become naturalized as a US citizen, just in time to claim the marital deduction on his wife's estate tax return.
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