Immigration laws and policy in the US are in the news almost daily, and with a diverse, multi-cultural population there are many families that have non-US citizen spouses or children. A family member is a non-citizen even if they have a green card and permanent residency, and of course would include those holding non-immigrant visas.
This brings up a few considerations that have to do with differences in estate planning rules when a non-citizen is married to a US citizen. The rule differences only apply when assets are transferred from the US citizen spouse to the non-citizen spouse.
Transferring Assets: Lifetime Gifts
The normal rule for gifts between spouses is that unlimited assets can be transferred tax-free during their lifetime. However, gifts to a non-citizen spouse are limited to a tax-free annual exclusion of $155,000, which is quite a difference when it comes to using lifetime transfers as an estate planning tool. Any amount given to a non-citizen spouse requires filing a gift tax return and will be deducted from your lifetime estate tax exemption limit.
Transfers at Death:
When assets are transferred in a will or trust to a spouse, there is typically an unlimited marital deduction from estate taxes. For non-citizen spouses there is a limit to the deduction amount and may result in taxes being owed.
Any amounts transferred in excess of the exemption should be held in a Qualified Domestic Trust (QDOT). There are some very specific rules for QDOTs including:
- There must be at least one trustee who is either a US person or corporation.
- There are limits on how much of the trust assets can be held in non-US real estate.
- QDOTs with more than $2 million in assets must have a bank or trust company as trustee.
- The spouse cannot remove QDOT assets from the US.
- Federal estate taxes may be withheld on distributions to the spouse in certain circumstances, but some of those rules were softened in the recent tax reform act.
Why Are There Different Rules for Non-Citizens?
Apparently, these rule differences are due to IRS concerns that non-citizens spouses might take assets out of the US to escape taxes. They are not worried about this for US citizens because they are subject to US taxes on worldwide income and assets, wherever they might be held.