Estate Planning

Couples with a non-U.S. citizen spouse and combined assets of less than the federal exclusion amount (currently $5 million) do not necessarily require a sophisticated estate plan. Generally, a simple Last Will and Testament will do. However, assets exceeding the exclusion amount which are passed to a non-U.S. citizen spouse will be subject to federal estate tax unless they are placed in a qualified trust.

Working with an estate planning attorney can help you establish a plan that best addresses your current situation as a non-US citizen.

Understanding Estate Taxes for Non-U.S. Citizens

Federal estate taxes can be as much as 35% of the value of the estate. It is important to note that the United States taxes all types of assets including life insurance proceeds and retirement benefits, as well as assets owned in foreign countries. In addition, jointly-held assets are fully taxed in the estate of the first spouse unless the non-U.S. spouse can prove he or she contributed to those assets.

Although many couples will not have enough assets to trigger Federal Estate Taxes, Maryland imposes Estate Taxes on estates valued over $5.04M. Couples with a non-US Citizen spouse may need to do tax planning to avoid or mitigate this tax.

If you are a couple with a non-citizen spouse, it is important that your estate plan is prepared by an attorney who understands the legal and tax implications of your situation.

Leaving Your Assets to Non-U.S. Citizens

The U.S. law doesn’t restrict you in this regard. However, the U.S. Government doesn’t want your foreign spouse to take the inheritance and leave the country. That’s why they have imposed taxes on gifts and estate that exceed a certain amount. Because U.S. Citizen spouses enjoy the privilege of the unlimited marital deduction, they don’t need to worry about paying taxes on gifts they give each other. However, gifts given to a non-citizen spouse are subject to $147,000 (+annual inflation adjustment) annual limit before they get taxed.

Qualifying for the Unlimited Marital Deduction

When researching estate planning, you may have stumbled upon the term “unlimited marital deduction.” It means that one spouse can transfer or gift unlimited assets to another spouse tax-free, as long as the receiving spouse is a U.S. Citizen. These assets then become a part of the other spouse’s estate. Unfortunately, this deduction doesn’t apply to non-citizen spouses, so the assets will be taxed if they exceed the federal estate tax exemption.

After your U.S. Citizen spouse dies, you typically have a 9-month window until your federal estate taxes are due. If, during that time, you become a U.S. citizen, you can take full advantage of the unlimited marital deduction.

Deferring Estate Taxes With a Qualified Domestic Trust

A Qualified Domestic Trust (QDOT) is a type of Trust designed to help non-citizen spouses defer paying taxes on the taxable portion of their inheritance. This Trust is often used by couples whose combined taxable assets exceed the $5 million threshold. It allows putting off the tax responsibility until the receiving spouse’s death, so that he or she has more funds to support themselves during their lifetime. But keep in mind that QDOT has strict qualification requirements.