Estate Planning for Non-Citizen Spouses

By Attorney Christine S. Anderson

November 2013

There is no limit to how much can be moved into a U.S. citizen spouse's name, during life or at death, for gift and estate tax purposes. Transfers from spouse to spouse qualify for the unlimited marital deduction. This is not true, however, if the spouse who is to receive the assets is not a U.S. citizen. The unlimited marital deduction applies with specific limitations in the context of transfers to a non-citizen spouse. The tax policy behind this restriction is that if a U.S. citizen or resident, who is subject to the wealth transfer tax laws of the U.S., transfers assets to a non-citizen spouse and then the non-citizen spouse moves out of the U.S. prior to death, the transferred assets will escape U.S. estate taxation. (The U.S. gift and estate tax applies to U.S. citizens and non-citizens who are resident in the U.S.)

A U.S. citizen or resident can transfer $143,000 annually to a non-citizen spouse, with no gift or estate tax implications. (In 2014, the annual exclusion for gifts to non-citizen spouses is $145,000.) Gifts to a non-citizen spouse in excess of the annual exclusion would result in use of the gift and estate tax exemption, currently $5,250,000 per person. The gift and estate tax exemption will increase to $5,340,000 in 2014.

A U.S. citizen or resident can leave the estate tax exempt amount to anyone: children, other relatives, friends or to a non-citizen spouse. To the extent that a U.S. citizen or resident has an estate in excess of the exemption amount and wants the amount in excess of the estate tax exempt amount benefit a non-citizen spouse in a tax efficient manner, those assets must be held in a Qualified Domestic Trust (QDOT) in order for those assets to qualify for the unlimited marital deduction. At least one trustee of a QDOT must be a U.S. citizen or domestic corporation. In addition, if any distributions of principal out of the QDOT are made to the non-citizen spouse, then estate tax must be withheld and paid at the time of distribution. Income distributions can be made to the non-citizen spouse without payment of estate tax. At the time of the non-citizen spouse's death, estate tax on the principal is due in the first deceased spouse's estate. If the non-citizen spouse is a resident of the U.S., his or her estate would be subject to U.S. estate tax, but would also qualify for the $5,250,000 estate tax exemption ($5,340,000 in 2014.) Unfortunately, this exemption won't be available to shelter the assets in the QDOT.

While we have many clients with spouses who are non-U.S. citizens, the tax planning that we do to defer estate tax until the second death is less complex these days, given the increase in the estate tax exemption.

If you have questions about how these rules apply to your family, call the office and schedule an appointment. We would be happy to meet with you to discuss these issues.