According to the Pew Research Center, 44.4 million foreign-born people lived in the US in 2017, 55% of whom were non-citizens.
This means there are many occasions when a non-citizen may be the beneficiary of the estate of a U.S. citizen. This may be the case, for example, if the non-citizen married a U.S. citizen. It’s important to understand that non-citizen spouses may be treated differently than citizens for estate and gift tax purposes.
No unlimited marital deduction.
For estate tax purposes, married people are generally presumed to share assets. So, when the first spouse dies, all assets are transferred to the surviving spouse with no estate tax due. An unlimited marital deduction is available to married couples when both spouses are U.S. citizens, which delays the payment of any estate tax until the death of the second spouse. However, if a U.S. citizen dies before his or her non-citizen spouse, the unlimited marital deduction is not available. If there is any estate tax due, it must be paid immediately. This is to prevent the spouse from taking their inheritance and leaving the country before paying this tax.
This obstacle can be overcome if the U.S. citizen spouse sets up a qualified domestic trust (QDOT), which gives the non-citizen spouse the benefit of the unlimited marital deduction but ensures taxes due will later be paid after the non-citizen spouse passes away. The non-citizen spouse must be the only beneficiary of the trust for his or her life, and the trustee must be a U.S. citizen or U.S. corporation. The non-citizen spouse, as the trust’s beneficiary, can receive the income that the trust property generates without having to immediately pay the estate tax. The estate tax on assets transferred to the QDOT will be deferred. If a distribution is made because the non-citizen spouse has an immediate need, the principal may also be distributed to him or her without incurring an estate tax liability. If the non-citizen spouse eventually becomes a U.S. citizen, the principal can be distributed to that spouse without any further tax.
Jointly owned property is treated differently.
If a married couple jointly owns a home, it belongs to both spouses equally when both are U.S. citizens. If one of the spouses is not a citizen, this presumption does not apply. For example, if the spouse who is a U.S. citizen dies first, and the jointly owned home is worth $200,000, the entire $200,000—instead of $100,000—will be included in that spouse’s taxable estate unless the non-citizen spouse proves he or she contributed a certain amount toward the purchase of the home. Thus, if the non-citizen spouse made $50,000 in mortgage payments, the amount included in the U.S. citizen spouse’s estate would only be $150,000.
No unlimited gifting.
Generally, spouses can make unlimited gifts to each other without having to pay the federal gift tax. However, if a U.S. citizen spouse makes a gift to a non-citizen spouse, there will be a gift tax if the gift is valued at over $155,000 (for 2019). Similarly, if the married couple buys property together, and the U.S. citizen spouse pays the entire purchase price, 50% of the value of the property will be considered a gift to the non-citizen spouse.
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Regardless of the immigration status of your loved ones, it’s important to create a well-thought-out estate plan to provide for them and to minimize your estate and gift tax liability. Contact us to schedule a meeting so we can design an estate plan that addresses your unique circumstances and needs.