Estate planning — Noncitizen spouses need special tax tools

Although U.S. citizens must pay federal gift and estate taxes on their assets, they enjoy important exemptions, exclusions and deductions — particularly if they’re passing assets to a spouse. However, different rules apply to noncitizen spouses. This article explores estate planning strategies for noncitizen residents and resident aliens. A sidebar proposes tax-efficient alternatives to the unlimited marital deduction.

For more information, please contact:
  • Mark J. Maxim, CPA

    Mark J. Maxim, CPA

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Estate planning
Noncitizen spouses need special tax tools

Although U.S. citizens must pay federal gift and estate taxes on their assets, they enjoy important exemptions, exclusions and deductions — particularly if they’re passing assets to a spouse. But what if you or your spouse is a noncitizen? Different rules apply that can make estate planning trickier.

Citizens vs. residents

Generally, U.S. citizens are subject to federal gift and estate taxes on all of their assets, wherever they’re located. But they’re also entitled to the:

  • Gift and estate tax exemption (currently $5.43 million),
  • Annual gift tax exclusion (currently $14,000 per year per recipient), and
  • Unlimited marital deduction, which permits one spouse to transfer tax-free any amount of property to the other spouse during life or at death.

U.S. residents are treated similarly to U.S. citizens by the IRS. They’re subject to federal gift and estate taxes on their worldwide assets, but can also take the estate tax exemption and annual gift tax exclusion.

IRS regulations define a U.S. resident for federal estate tax purposes as someone who had his or her domicile in the United States at the time of death — even if the deceased lived there only briefly. To determine residency, the IRS analyzes various factors, including the relative time spent in the United States, the locations and values of residences, visa status and community ties.

Rules for nonresident aliens

Tax treatment of nonresident aliens — individuals who are neither U.S. citizens nor residents — is a little different. On the positive side, they’re subject to U.S. gift and estate taxes only on property that’s “situated” in the United States and they’re eligible for the gift tax exclusion.

However, nonresident aliens can’t use the marital deduction (see the sidebar “No marital deduction? A few solutions”), and their estate tax exemption is only $60,000. So substantial U.S. property holdings can result in a big tax bill. Taxable property includes U.S. real estate and tangible personal property located in the United States. Determining whether intangible property such as stocks, bonds and partnership interests is taxable is more complicated. Some may be subject to gift, but not estate, tax and vice versa.

Explore alternatives

If you or your spouse is a noncitizen, traditional estate planning tools may not adequately minimize your gift and estate tax exposure. Your advisor can help you explore alternative estate plans. 

No marital deduction? A few solutions

The unlimited marital deduction, which allows a spouse to transfer tax-free any amount of property to the other spouse, isn’t available for gifts or bequests to nonresident aliens. However, a U.S. citizen or resident spouse can make tax-free transfers to a noncitizen spouse by 1) using his or her $5.43 million exemption, 2) making annual exclusion gifts (currently, the limit for gifts to a noncitizen spouse is $147,000), or 3) bequeathing assets to a qualified domestic trust containing certain provisions.

Note that noncitizens can use the marital deduction to make transfers to U.S. citizen or resident spouses.

Other articles in the August 2015 Edition of Business Matters: