Setting Up a Living Trust for a Non-Citizen: Linda McCartney's Trust for Paul McCartney as a Model

Lady Linda Eastman McCartney was not only the beloved wife of Sir Paul McCartney.  She was also the daughter of lawyer and art collector Lee Eastman (né Leopold Vail Epstein) and his first wife Louise Sara Lindner Eastman, heiress to the Lindner Department Store fortune who died in a plane crash on March 1, 1962.  Linda was born in New York City and retained her American citizenship throughout her life.

According to the New York Times, Lee Eastman's firm Eastman and Eastman formed with his son John represented such luminaries as David Bowie, Billy Joel, Andrew Lloyd Webber and the estate of Tennessee Williams.  Eastman also formed M.P.L. Communications dedicated the Paul McCartney's music ventures.  In addition, Lee Eastman represented McCartney in the dissolution of the Beatles partnership.

Diagnosed with breast cancer in 1995, Linda McCartney died in Tucson, Arizona on 17 April 1998.  One of her memorial services was held at Riverside Church in New York.  Linda McCartney's Will was probated in New York.  Benefiting from her family's legal expertise, she left her entire estate to her husband of 29 years, Paul McCartney, in a Qualified Domestic Trust (QDOT).  The QDOT is a very useful estate planning tool when one spouse is not a U.S. citizen because the couple is not able to take advantage of the marital deduction to avoid estate taxes upon the death of the first spouse (note that the estate tax is repealed for 2010).

What is the estate marital deduction?  Section 2056 of the Internal Revenue Code (IRC)  permits United States citizens to transfer at death unlimited amounts of assets to the surviving spouse.  The Code also allows couples to create a marital trust such as a Qualified Terminable Interest Property (QTIP) Trust or through A-B Trusts. 

However, when one spouse is a non-citizen, Section 2056 does not apply.  Thus, the surviving spouse will have to pay estate taxes for assets above the federal and state exemptions.   The QDOT is created in order to avoid estate taxes being paid by the surviving spouse on assets that exceed the exemptions.  I.R.C. §2056A governs the requirements for a QDOT:

• A QDOT must qualify for the marital deduction as provided for in §2056.  That means that the QDOT must specify that all income from the trust be distributed to the surviving spouse.
• 
  The trustee of the QDOT must be a citizen of the United States.
• If the estate is valued at more than $2 million, then
• at least one of the trustees must be a U.S. bank or a trust company; or
• the individual U.S. trustee must furnish a bond or letter of credit equal to 65 percent of the fair market value of the assets in the trust.
• If the asset is valued at less than $2 million, then
• either a U.S. bank or a trust company must be the trustee; or
• less than 35 percent of the trust assets can be non-U.S. real property.
• When distributions are made from the trust, estate tax must be paid on each distribution.  The trust must be drafted such that the trustee has the right to withhold the estate taxes due. 
• The surviving non-citizen spouse may be eligible for a hardship distribution defined as an immediate need for financial support related to the spouse's health, maintenance, education, or support.

Because Linda McCartney retained her U.S. citizenship, set up the QDOT trust to benefit Paul, and had her Will probated in New York, Sir Paul was able to avoid paying up to 40% in British inheritance taxes.  The QDOT also meant that she was able to pass her entire estate to her husband free of federal and state estate taxes.

What is the lesson to be learned from Linda McCarthy's Will?  Each person's estate is unique, and no boilerplate form can take the place of a carefully crafted Will in the hands of a competent attorney.  Because she obtained excellent legal counsel, Linda was able to pass on the full benefit of her estate to her beloved husband.  Your unique estate deserves the quality attention it will be given by your attorney.

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