There are unique estate planning considerations if you or your spouse is not a citizen of the United States. Residency status affects you or your spouse’s estate tax liability as well as your marital deduction.
Estate Taxes and the Rules of Residency
Legal residents of the United States are treated similarly to citizens for tax purposes. Determining residency can be complicated, however. For estate tax, the IRS defines a resident as a person who was domiciled in the United States. Domicile, or a person’s permanent residence, is the key factor here. A person, for example, may have multiple residences – such as vacation homes – but can only have one domicile.
If you are domiciled in the United States at the time of your death and your estate is over the $5.49 million exemption, the excess estate incurs a 40% estate tax rate. Similar to citizens, US residents can also take advantage of the $14,000 annual gift exclusion, allowing you to give any number of recipients up to $14,000 without incurring gift tax.
Annual Gift Exclusion Rules for Non-Citizen Spouses
For United States citizens, there is an unlimited marital deduction which allows you to give money or property to your spouse without incurring gift tax. If you or your spouse are not citizens, these rules change. You are still allowed to give money to your non-citizen spouse (or resident alien for tax purposes) each year without incurring gift tax, but the allowable threshold is $149,000 as of 2017. Your spouse can become a citizen after your death and receive the unlimited marital deduction. However, they must attain citizen status prior to filing the estate tax return which is typically due within nine months after the date of death.
Minimizing Your Taxable Estate
If you have an estate value over the federal estate tax threshold, you may want to consider lowering your taxable estate to minimize your estate tax liability. If you have a non-citizen spouse, consult with a tax planning specialist before drafting or making changes to your estate plan.
The first option is to lower your taxable estate over the course of several years by using the annual gift exclusion. A second option commonly used by citizens married to resident aliens is a Qualifying Domestic Trust, or QDOT. A QDOT essentially allows a non-citizen spouse to claim the marital deduction as if they were a citizen, thereby deferring estate tax until the surviving spouse’s death. QDOTs have unique requirements, so be sure to consult with your financial advisor if you want to create a Qualifying Domestic Trust.
For US citizens with sizable estates who are married to non-citizens, proper estate planning is vital to preventing a hefty estate tax liability. Contact a Fifth Third Bank financial advisor today to get started.