Estate Planning Tips: When Your Spouse is a Non-Citizen

Estate planning is a complex endeavor on its own, but there are a few circumstances that can make it even more complex, such as when a spouse is not a U.S. citizen. While there are a few limitations to be aware of, there are also some strategies that make it possible to leave assets to a non-citizen spouse. First, we’ll look at the main challenges.

Loss of the Unlimited Marital Deduction

The unlimited marital deduction allows U.S. citizens to pass an unlimited amount of assets to their spouses tax-free. However, this generally does not apply to non-citizen spouses.

Estate and Gift Tax Rules

For assets held within the United States, there are differing rules that apply to non-citizen spouses regarding gift and estate taxes. Establishing domicile is a critical component of the process, and domicile is very different from residency.

“Domicile” refers to an individual’s “true home,” as opposed to their current residence. One domicile must be established for estate tax purposes. The Internal Revenue Service (IRS) may consider a person on a non-resident visa (like a G-4) as U.S. domiciled for estate and gift tax purposes, despite that person being considered a non-resident for income tax.

Non-citizens domiciled in the United States are subject to an estate tax exemption, which is typically higher than the exemption for non-domiciled non-citizens, after which the estate is responsible for 40% estate tax. These amounts regularly change with legislation, so it’s important to check with an estate planning professional to verify the current exemptions.

International Asset Taxes

If either spouse owns foreign assets, those countries’ laws could affect gift and estate taxation, potentially resulting in double taxation or other conflicts. The U.S. currently has estate tax treaties with several foreign countries, which provide more generous exemptions for non-U.S. citizens.

Solution: The Qualified Domestic Trust (QDOT)

A QDOT allows a non-citizen surviving spouse to take advantage of a marital deduction on estate taxes for any assets placed within that trust. The surviving spouse will be eligible for the full marital deduction on the estate tax. It’s also possible for the surviving non-citizen spouse to set up and fund a QDOT before the federal estate tax return is filed, in the case of the decedent failing to do so before death.

At least one trustee of the QDOT must be a U.S. citizen or a domestic corporation legally authorized to retain the estate tax.

It’s also important to note that the QDOT does not exempt the trust from the estate tax, but defers it until the death of the surviving non-citizen spouse.

Work with a Professional Estate Planning Attorney

Setting up a QDOT is best done with the advice of an experienced estate planning attorney who can help you navigate the intricacies of state and federal laws around non-citizen spouse inheritance.

Wills & Wellness Estate Planning has the expert knowledge to create the right strategy to protect your assets and your beneficiaries when it comes to citizenship concerns, as well as guidance for general estate planning.