The richest people in the world see the U.S. as a safe place to keep their family money. But when they need to pass on the inheritance, an unexpected tax bill may appear. Non-U.S. citizens who own property in the United States, whether they live abroad or are not U.S. residents, could be subject to U.S. estate taxes. As such, you must plan carefully to keep your tax losses minimal.
Here is a list of things to think about, but be mindful that estate planning for wealth owners is a highly complex subject, and you should be ready to get the legal and financial help tailored to your case and the places where you have assets.
What are Non-Citizen Tax Considerations?
Understanding the tax implications of owning property in the United States is crucial for effective estate planning, especially when it comes to transferring assets to heirs. The rules governing estate and gift taxes differ significantly for non-citizens compared to U.S. citizens. Here’s a closer look at some key considerations.
Foreign Property Taxed in the U.S. for Residents
All wealth, whether acquired domestically or abroad, is subject to federal gift and estate taxes for U.S. citizens and non-citizens who are considered “residents” by the Internal Revenue Service. However, the $18,000 annual gift tax exclusion and the $13,610,000 lifetime gift and estate tax exemption are also available to U.S. citizens. A non-citizen is generally considered a permanent resident if they plan to stay in the U.S. forever and reside there.
When a permanent resident decides to leave the country, they will be subject to a capital gains tax on their assets’ value, known as an exit tax.
Different Regulations for Non-Residents
Only assets “situated” in the U.S. are liable to U.S. estate and gift taxes for non-residents, meaning non-citizens who do not plan to stay in the U.S. However, if the non-resident owns a lot of property in the U.S., their estate tax exemption is lowered to $60,000, which might lead to a hefty estate tax payment. Another concern is that they can be double-taxed if they must also pay estate tax in their home country. A few nations have established estate and gift tax treaties with the U.S. and, when a person dies, their assets may not be subject to taxes in both their home country and the U.S.
Guidelines Specific to Non-Citizen Spouses
Unfortunately, there is no option for an unlimited marital deduction. U.S. citizens must understand that the unlimited marital deduction only applies to transfers or gifts to non-citizens if their spouse, by chance, is a green card holder. Only $185,000 may get transferred each year tax-free to a spouse who happens not to be a U.S. citizen. On the other hand, the unlimited marital deduction can be used for transfers from non-citizen partners to citizen spouses.
Tip: By setting up a qualified domestic trust (QDOT), a U.S. citizen spouse can keep the assets that a non-citizen partner inherits from having to pay estate taxes on them. A U.S. citizen can avoid giving their non-citizen partner a direct gift if they put their assets in a trust instead. As long as the non-citizen spouse is alive, the trust may only have the spouse as a beneficiary. Non-citizen spouses may avoid paying estate tax on income generated by the trust property if they are named trust beneficiaries.
Transfers to the QDOT are exempt from estate taxation until the distribution of principal occurs. The principal may also be passed to a non-citizen spouse without estate tax obligation if done due to an urgent, immediate necessity and no other resources available. In addition, the principal will be tax-free to the non-citizen spouse if they become a U.S. citizen.
The QDOT form must be established when the surviving spouse’s estate files the estate tax return concurrently with transferring the property to it. Often, it is effective on the citizen spouse’s death and devised when both partners are still living.
Treatment of jointly held property varies
Any time married couples are citizens of the U.S, the law will assume the marital dwelling belongs to them both equally. This means the house is valued at half its amount, as if each couple owned it individually. This assumption, however, is null and void if neither spouse is a citizen.
So, What Exactly is a QDOT?
A QDOT allows transferring assets tax-free to a surviving spouse who isn’t an individual citizen of the U.S. This is simply because the estate is structured as a QDOT and will, therefore, exempt this from the estate taxes of the U.S. When transferring assets to a spouse who isn’t a U.S. citizen, marital deductions cannot be applied. This trust makes it possible to do just that.
Here are some reasons a QDOT is needed:
Exclusion of Non-Citizen Spouses from Unlimited Marital Deduction:
U.S. citizens may only take advantage of the limitless marital deduction under U.S. estate tax law, which applies to transfers to surviving spouses. The unlimited marital deduction does not apply to transfers to a non-citizen spouse, which can lead to significant tax liabilities. This can result in a 40% estate tax based on the spouse’s citizenship status at the time of death. A non-citizen spouse may not have to pay estate taxes upon death if they return to their country of origin.
Exclusion of Estate Taxes to Non-Citizens:
The assets within the U.S. are subject to federal estate tax for both American citizens and non-residents. Their exemption from estate tax is around $60,000, which is much lower. The tax liability will become significantly higher if a QDOT is not employed because U.S. situs assets exceeding $60,000 incur an estate tax of 40%.
How Does Residency Affect Estate Taxes?
Residency status is the most significant factor that defines which estate tax liabilities apply. The Internal Revenue Service relies on the “domicile” concept to determine who is due for the higher exemption. If you can expect to stay permanently in the U.S., you will be deemed domiciled in the country. If a non-citizen does not satisfy the above criteria, he or she is technically not a resident and will be subjected to the lesser exemption.
How Mucci Law Can Help
Estate planning for non-U.S. citizens poses unique legal challenges, but Mucci Law can help navigate this complexity. Our experienced attorneys specialize in estate planning for non-U.S. citizens encountering tax laws and residency requirements in the U.S. We also have experience protecting assets and creating a secure legacy. Whether encountering cross-border assets or aligning with U.S. estate tax regulations, Mucci Law develops strategies suited to your needs. Let Mucci Law be your means of estate and asset protection. Contact us now so we can start planning for your security and success.
FAQs
What is estate planning, and why does it matter?
Estate planning is organizing your belongings and writing formal papers, like wills and trusts, that tell others what you want to happen after you die.
Can a non-U.S. citizen prepare an estate plan?
Yes, they can plan an estate in the U.S. However, they may be limited to some tax and distribution laws that apply to assets outside the country. The assistance of an attorney will, therefore, be required.
How often should I update my estate plan?
Good estate planning requires revisiting and updating your estate plan every few years or during significant life events, such as getting married, having a child, divorce, or other substantial changes in your financial direction.
Abhishek Shah
