Estate & Trust Tax

Estate Planning Dangers for Non-U.S. Citizens

  • A combined 45% estate tax may be due upon the first spouse’s death.
  • The imposition of gift tax will result from asset transfers between spouses unless under the annual exemption amount for non-U.S. citizens.
  • A court may restrict U.S. citizen children from exiting the United States to be reunited with foreign guardians.
  • Life insurance owned by a spouse to avoid inclusion in the insured’s estate may be taxed upon the surviving spouse’s death.
  • In the event of an incapacity, there can be complications in a conservatorship proceeding.

Estate Tax

A non-U.S. citizen spouse does not enjoy an automatic Unlimited Marital Deduction as a U.S. citizen spouse would, thereby resulting in the imposition of estate tax on assets over the Estate Tax Exemption amounts. For 2019, the federal estate tax exemption amount is $11.40 million per individual; but there are also individual state exemptions to consider: the New York estate tax exemption amount is $5,740,000; for a person in New Jersey, there is no estate tax at all as of Jan. 1, 2018.

However, if the “Qualified Domestic Trust” is utilized for any trust created under a Last Will and Testament, the Unlimited Marital Deduction election may be made for a non-U.S. citizen as well.

The Qualified Domestic Trust includes federally-mandated provisions that will allow the trust to qualify for the Unlimited Marital Deduction in spite of foreign citizenship, resulting in no estate taxation upon the first spouse’s death. Later distributions of principal from this trust may be subject to a high tax. Individuals whose estates are over the exemption amounts discussed above should consider the Irrevocable Life Insurance Trust, which is discussed in detail below.

At the very least, a Last Will and Testament with the Qualified Domestic Trust language needs to be prepared for a non-U.S. citizen.

Gift Tax

If both spouses are U.S. citizens, they can give an unlimited amount of assets to each other without incurring a gift tax. Tax free annual gifts to anyone other than a spouse are limited to $15,000 per year.

If a client’s spouse is a non-U.S. citizen, the federal government has adopted a hybrid approach. A person can transfer $155,000 in 2019 to a non-citizen spouse.

It is often advantageous to place assets in a spouse’s name to utilize their tax exemptions. If a wealthy client has a non-U.S. citizen spouse, the type of asset allocation that U.S. citizens could accomplish tax free in a day may take years. Therefore, it is important to begin planning early.

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