Traditional estate planning strategies generally are based on the assumption that both spouses are U.S. citizens. However, if you or your spouse is a noncitizen, special rules apply that may require additional planning. Here’s a look at how the rules are different when one or more noncitizens are involved.
U.S. Citizen vs U.S. Resident. If you’re a U.S. resident, but not a citizen, you are treated similarly to a U.S. citizen by the Internal Revenue Code. You are subject to federal gift and estate taxes on your worldwide assets, but you also enjoy the benefits of the current $11.58 million estate tax exemption and the $15,000 annual gift tax exclusion. (Both of these amounts are for 2020). You can double the annual exclusion to $30,000 through gift-splitting with your spouse, if he or she is a U.S. citizen or resident. Special rules apply to inheritances by a noncitizen spouse from his or her spouse, as discussed below.
Defining “Residency”. Residency is a complicated subject. IRS regulations define a U.S. resident for federal estate tax purposes as someone who had his or her domicile in the United States at the time of death. One acquires a domicile in a place by living there with a present intention of making that place a permanent home. Whether you have your domicile in the United States depends on an analysis of several factors, including the relative time you spend in the U.S. and abroad, the locations and relative values of your residences and business interests, visa status, community ties, and the locations of family members.
What if you are a “Nonresident Alien”? If you are a nonresident alien – that is you’re neither a U.S. citizen nor U.S. resident – there’s good news and bad news in regard to estate law. The good news is you’re subject to U.S. gift and estate taxes only on property that is ‘situated” in the United States. You can also take advantage of the $15,000 annual exclusion (although you can’t split gifts with your spouse). The bad news is your estate tax exemption drops from $11.58 million to a mere $60,000, so substantial U.S. holdings can result in a big estate tax bill. Taxable property includes U.S. real estate as well as tangible personal property such as cars, boats and artwork located in the United States. Determining the location of intangible property, such as stocks, bonds, partnership interests and other equity or debt interests, is more complicated.
Inheriting from your spouse. A U.S. citizen or resident who leaves an inheritance to a U.S. citizen spouse is able to use the “unlimited marital deduction” to avoid federal estate taxes on the transfer. This is not available for transfers to spouses who are not citizens, even though he or she may be a U.S. resident. However, if a U.S. citizen or resident leaves an inheritance to a spouse who is a noncitizen, he or she can use the $11.58 million exemption for bequests to the spouse.
Excerpts taken from an article published by EHTC CPAs and Business Consultants in their newsletter dated August 19, 2020
If you have any questions on estate planning, please call Karen L. Stewart, Attorney and Counselor at (248) 735-0900. For more information, please see my website, www.customestateplans.com