Estate Planning Strategies for Non Citizens
February 18, 2016
The United States is one of the few industrialized countries to impose transfer taxes based on citizenship or residency in the U.S. For purposes of this article, a “resident” is one who acquires a domicile in the U.S. by living there, however briefly, with no definite apparent intention of leaving. It can apply to U.S. citizens, permanent resident alien (PRAs or greencard holders) and Non Resident Aliens (NRAs).
U.S. citizens and PRAs are subject to estate and gift tax on worldwide assets. For NRAs, however, the rules become much more complex. Deceased non residents are subject to U.S. estate taxation with respect to their U.S.-situated assets (generally, U.S. real estate, tangible personal property in the U.S., and securities of U.S. companies).
Estate tax treaties between the U.S. and other countries often provide more favorable tax treatment to non residents by limiting the type of asset considered situated in the U.S. and subject to U.S. estate taxation. The United States has established Estate Tax Treaties with certain countries to establish a domicile for the prevention or mitigation of double taxation. Estate Tax Treaties exist with Australia, Austria, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, Norway, South Africa, Sweden, Switzerland and United Kingdom. Terms vary by country.
Marriages with a non-citizen spouse
A marriage to a non-U.S. citizen (whether a permanent resident alien or non resident alien) presents its own unique issues which also require specialized estate planning.
For federal estate tax purposes, any transfer to a spouse qualifies for an unlimited federal estate tax deduction. This means that you can pass unlimited assets to your spouse and pay no federal estate tax (the theory being that the U.S. does not want to impoverish a spouse by imposing a wealth transfer tax on transfers to the surviving spouse).
The unlimited marital deduction, however, is not available when assets are transferred to a spouse who is not a U.S. citizen. However, transfers to a non-citizen spouse, can qualify for the unlimited deduction if a Qualified Domestic Trust (QDOT) is used.
Basic parameters of a QDOT include:
- The Trustee of the QDOT must be a U.S. Citizen or a U.S. Trust Entity.
- No distributions (except income) may be made from the trust unless the Trustee has the right to withhold the U.S. estate tax imposed on such distribution.
- The executor must make a QDOT election on the U.S. estate return. No election may be made on a return filed more than one year after the due date for such a return, including extensions.
The PRA or NRA may opt to become a U.S. citizen prior to the filing of the estate tax return (usually within nine months of the citizen spouse’s death).
- Non-citizen spouse can transfer assets to the QDOT in order to qualify assets for the unlimited deduction.
Other issues that citizens married to non-citizens should be aware of include:
- Gifting. Gifts from the citizen spouse to the non-citizen made during life are eligible for an annual exclusion ($134,000 in 2010). Gifts from the non-citizen spouse to a citizen spouse are eligible for the full marital deduction. To avoid inadvertent gifts, it is recommended that joint accounts be avoided when one spouse is not a citizen.
- Life Insurance. While proceeds of a life insurance policy of a NRA are not subject to the U.S. estate tax, proceeds of a life insurance policy owned by a U.S. citizen are subject to U.S. estate tax.
Please keep in mind this is a very high level overview of an incredibly complex issue. Working with an estate planner and a tax professional may save a lot of time and money in the long run to ensure that your estate is administered they way you want.
Non Resident Aliens (NRAs)
- May be subject to U.S. transfer taxation on worldwide assets if they are U.S. domiciliaries with a physical presence in the States and intent to remain in the States. (Keep in mind, “residence” is subjective and based on such factors as location of residence, employment and family. If residency is established, transfer taxes will apply regardless of whether the NRA remains in the United States or whether assets are situated outside of the United States.)
- Subject to federal gift and estate tax only on U.S. property they directly own, not property owned through a foreign corporation.
- Are exempt from taxation on life insurance proceeds, U.S. bank deposits and U.S. debt obligations.
- May be able to shelter assets from federal taxation by transferring U.S. assets to non-U.S. corporations.
- Are able to make unlimited estate and gift tax charitable deductions but only for U.S. charities; contributions to foreign corporate charities are not eligible.
Non Resident Aliens should also be aware that:
- Real property is subject to the U.S. estate tax. If a second home is purchased by the NRA in the United States, it will be taxed. If the home was purchased by a foreign corporation owned by the NRA, it may not be subject to U.S. estate tax.
- Tangible personal property (cash, art, jewelry, furniture, etc.) located in the United States are subject to U.S. estate taxation.
- Shares of stock issued by a domestic corporation are subject to U.S. estate tax, even if the NRA held the certificates abroad or registered the certificates in the name of a nominee.
© 2004 RGPC Articles are not intended to be comprehensive. Readers should not act upon any information herein without seeking specific legal advice from the Firm’s attorneys.