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Special Planning Considerations for Non-U.S. Spouses

Sanford Stolar, CPA
12.14.2017 | Berdon Industry Insights

You just met the person of your dreams, you marry quickly or even elope, but you never discussed how your new spouse’s non-U.S. citizen status will impact your future financial decisions. This scenario is not uncommon, but it is one that can cause complex gift and estate tax issues for you and your spouse.

One must let their advisors know if their spouse is a non-U.S. citizen because planning will be different based on the following considerations:

  • Life insurance planning, which needs to be specifically structured
  • Prenuptial agreements, if applicable
  • The structure and ownership of a family business; if applicable
  • Ownership of marital and premarital assets

First, become familiar with some key terms regarding this issue:

  • Situs assets – Where the asset is treated as being located for legal purposes. Generally, a U.S. situs asset is real or personal property located in or having a connection to the U.S.
  • Domicile – The country where one lives and has no intention of leaving

Highlights of Current Gift and Estate Tax Law

The unlimited marital deduction which allows you to transfer as much as you want to your spouse at any time is typically not allowed for transfers to non-U.S. citizen spouses. This holds true even if your non-U.S. citizen spouse is a green card holder or domiciliary of the United States. Other highlights of current law are as follows:

  • U.S. citizens and U.S. domiciliaries are subject to estate and gift tax on worldwide assets
  • Non-U.S. citizens who are non-domiciliaries are subject to estate and gift taxes on U.S. situs assets
  • U.S. citizens and U.S. domiciliaries are entitled to a lifetime exemption of $5.49 million on transfers for estate and gift tax purposes
  • Everyone is entitled to an annual exclusion for gift tax on gifts of $14,000 per person. U.S. citizens and/or U.S. domiciliaries who are married can elect to split gifts with their U.S. citizen or U.S. domiciliary spouse or each can make a gift of $14,000 to a person, for a total of $28,000 per couple.
  • Non-U.S. citizens who are not U.S. domiciliaries will have a $60,000 exemption for transfers of U.S. situs property at death
  • The unlimited marital deduction is generally not available for transfers of assets to non-U.S. citizen spouses

As if the rules are not confusing enough, the test to determine if a non-U.S. citizen is considered domiciled for U.S. estate and gift tax purposes is different than determining U.S. income tax residency. One can be considered a resident for income tax purposes, but not a U.S. domiciliary for gift and estate purposes. U.S. domicile is determined by the place that the person calls home at the time of the transfer. It is a subjective analysis, which takes various factors into account, such as if an individual has applied for a green card and if he/she has the “intention” of living permanently at their present residence.

Proper Estate and Gift Tax Planning is Essential

If not aware of the potential gift and estate tax law related to transfers to non-U.S. citizen spouses, an individual could find themselves with adverse tax consequences when transferring assets to a spouse. One example is when a U.S. citizen spouse uses his or her own property to set up a joint tenancy. Depending on the type of asset transferred in joint tenancy and the location of the asset, the transaction could be deemed a gift upon creation or termination of the joint tenancy.

Some of the common complexities and challenges related to individuals transferring assets to non-U.S. citizens are highlighted below.

Estate Tax

The lack of a marital deduction for transfers at death to a non-U.S. citizen spouse, regardless of if he/she holds a green card or is considered a U.S. domiciliary, can trigger estate tax if assets are transferred directly to a non-U.S citizen spouse. This includes transfers to your spouse through trusts.

A common estate planning tool used to defer the tax is a known as a Qualified Domestic Order Trust (“QDOT”). Under this technique, the assets are transferred into a QDOT and are held for the benefit of the non-U.S. citizen surviving spouse. The estate tax on this is not avoided but merely deferred.

Generally, the estate tax on the assets transferred to the QDOT will be due either when the non-U.S. citizen spouse receives distributions in excess of income or upon disposition of the assets resulting from the death of the non-U.S. citizen surviving spouse.

Absent using a QDOT for deferred tax, a marital deduction may still be allowed if the surviving non-U.S. citizen spouse was domiciled in the U.S. at all times after date of death and becomes a U.S. citizen before the filing of the U.S. decedent’s estate tax return (even after the date of death).

Gift Tax

You have to be very careful when transferring assets to a non-U.S. citizen spouse during your lifetime. Some general guidelines include:

  • The generous gift tax rules that apply for transfers to U.S. citizen spouses are not available for transfers to non-U.S. citizen spouses
  • The gift tax marital deduction is not available for transfer of assets made to non-U.S. citizen spouses.
  • There is no exception for a non-U.S. citizen donee spouse who becomes a citizen after receiving gift(s) (unlike the estate tax exception above)

However, you should also consider the following when planning:

  • When a U.S. citizen spouse transfers assets to a non-U.S. citizen spouse, the annual exclusion is allowed is $149,000 (for 2017) which is greater than the $14,000 annual exclusion allowed for gifts to all other individuals
  • Living expenditures to support the couple and their family are not considered gifts, as well as, expenditures made to meet legal spousal support obligations

The estate and gift tax laws for non-U.S. citizens are quite complex. Therefore, if you are a non-U.S. citizen or your spouse is, consult a tax accountant or tax attorney about these issues.

Berdon LLP, New York Accountants