In our globally connected world, it’s not uncommon for US citizens to marry non-citizens. If you’re married to a non-citizen and are beginning to think about estate planning, you’re probably wondering how your spouse’s citizenship status will affect their ability to inherit property and other assets if you die first. Fortunately, estate planning with a non-citizen spouse is largely the same as estate planning with a spouse who is a citizen, especially if you have a smaller, relatively simple estate. However, there are some key differences that affect affluent couples, and it’s a good idea to familiarize yourself with the estate tax rules for non-citizens if you plan to leave a large estate to your spouse.
What Is the Same for Citizens and Non-Citizens?
First, let’s look at some of the similarities for estate planning with citizens and non-citizens. Regardless of your spouse’s citizenship status, both of you should create wills or living trusts to name beneficiaries for assets that you own in the US. As long as you are a citizen, your non-spouse citizen can name you as a beneficiary and leave any amount of their assets to you without having to worry about their estate being subject to federal taxes, thanks to something called the unlimited marital deduction. You can also name your non-citizen spouse as a beneficiary, but your estate will be subject to federal taxes if it is over a certain amount because a non-citizen doesn’t qualify for the unlimited marital deduction.
In addition to creating your wills or living trusts, you and your spouse should both name beneficiaries for your retirement accounts (most couples either name their spouse or their children). You should also make durable powers of attorney for health care and finances. Power of attorney simply allows you to name someone else to make your financial or medical decisions if you become incapacitated and are unable to do so yourself.
When a Non-Citizen Spouse Would Owe Federal Estate Tax
As mentioned previously, assets of any value left to a US citizen spouse will not be subject to federal estate or gift taxes. However, non-citizen spouses who inherit more than $5.34 million in 2014 have to pay 40% of the excess in estate taxes. For example, an estate worth $6.34 million would leave a non-citizen spouse owing $400,000 to the IRS. Clearly, 40% of the excess of your estate is no small sum, and it’s in your best interest to come up with a strategy to avoid this tax if you have a large estate.
Avoiding or Reducing the Estate Tax
There are several different ways you and your spouse can avoid or at least reduce the estate tax. Strategies include:
Making yearly gifts to your spouse that are less than the annual exclusion. Gifts from one spouse to another qualify for a relatively large annual exclusion, even if one spouse is a non-citizen, so it is possible to gradually reduce the value of your estate and transfer assets to your spouse. The amount of the annual exclusion changes every year due to inflation, but as of 2014 you can transfer up to $145,000 in assets to your spouse without being subject to the federal gift tax.
Creating a QDOT trust. If you set up a qualified domestic trust (QDOT), you can leave assets to the trust rather than your spouse after your death. Your spouse will be the beneficiary for the trust as long as he or she is alive, and can use any income generated from the trust without having to worry about estate taxes. However, actual assets taken out of the trust will be subject to the federal estate tax, unless your spouse becomes a US citizen before using assets from the trust. Essentially, this is a method to defer estate taxes rather than avoiding them completely.
Becoming a US citizen. If your spouse becomes a US citizen, they will qualify for the unlimited marital deduction and won’t have to worry about the federal estate tax. It is possible for a spouse to become a citizen after their partner’s death, but they must attain citizenship before the estate tax is due (typically nine months) in order to get the deduction.
Of course, some non-citizen spouses do not wish to become US citizens, especially if it means that they would have to renounce their citizenship in their home country. This makes estate planning with a large estate somewhat more complicated, so it’s a good idea to talk to an estate planning attorney about your best options for minimizing your taxable estate.
About the Author:
Christopher Q. Wintter is the founder of Wintter & Associates, P.A. and a board-certified expert in Trust and Estate matters by the Florida Bar. With more than 24 years’ experience as a practicing attorney, he also serves as an instructor and faculty member for the National Institute of Trial Advocacy (NITA)—the nation’s leading provider of legal advocacy skills training to practicing attorneys—and has earned the AV® Preeminent™ rating with LexisNexis Martindale Hubbell. He was also selected for inclusion in Florida Super Lawyers for 2011, 2012, and 2014 in Estate and Trust Litigation.