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Estate Plans Including Non U.S.-Citizen Spouses

Posted on: April 23rd, 2015
non resident spouse lawProperly structured trusts and tax planning help to adequately preserve domestic and international assets. How should married couples structure their estate plans when one spouse is not a United States citizen? Providing for a spouse who is a citizen of a foreign country is different than addressing assets abroad.

Our estate planning attorneys help clients manage assets domestically in multiple states and in international jurisdictions. The challenges couples face when each spouse is a citizen of a different country include the following tax concerns:

Estate tax exemption awareness. Non-U.S. citizen spouses might not be familiar with U.S. tax laws. For example, couples who are both citizens of the United States enjoy an unlimited marital deduction when one spouse dies. The unlimited marital estate tax deduction of a deceased U.S. citizen spouse is not available for a non-U.S. citizen surviving spouse. Instead, a surviving non-U.S. citizen spouse must pay estate tax with a rate up to 40% of assets over the current $5.43 million exemption. The use of custom trusts, like a QDOT (Qualified Domestic Trust) can help minimize the estate tax burden in these circumstances.

Life insurance benefits. The proceeds of a policy for a deceased U.S. citizen spouse will be included in their taxable estate, which adds to the aforementioned concern of estate tax debt for a surviving foreign spouse. However, in most circumstances death benefits pass with no income tax liability. A way to help preserve life insurance benefits for a surviving spouse while minimizing estate tax includes the use of an ILIT. An Irrevocable Life Insurance Trust can be created naming the foreign spouse as beneficiary, and the trust is then named beneficiary of the insurance policy. Upon the death of the insured, benefits pass directly into trust and remain free from estate tax.

Residency and citizenship. An individual can maintain citizenship in another country and be a resident of the United States. The United States taxes both residents and citizens of the U.S. on all their worldwide assets. As cited by the American Bar Association, non-citizen spouses who are residents of the U.S. are “fully subject to U.S. estate, gift, and generation-skipping transfer taxes on worldwide assets.” 

Unlimited gifts. When creating an estate plan and selecting assets to bequeath to a spouse, a couple might decide that a more tax-advantageous method is gifting assets throughout their lifetimes instead of post-death. A spouse, regardless of their citizenship, may make unlimited lifetime gifts to their U.S. citizen spouse without gift tax consequences. The gifts qualify for the unlimited gift tax marital deduction. However, a U.S. citizen may make an annual tax-free gift up to $147,000 (2015 tax year limit) to their non-U.S. citizen spouse.

Relocation. Just as a domestic move from one state to another triggers an estate plan review, the same should be done for a married couple who decide to move from their home in the U.S. to establish residency in another country. The laws in the country of their future home should be reviewed prior to relocating. It might be in the couple’s best interest to connect their current attorney with one in their new country, and take into consideration translation services if needed.

If you are concerned your estate plan needs to be modified to address the unique planning concerns domestic spouses married to foreign partners must manage, schedule a review with your estate planning and tax attorneys. Special planning through prenuptial agreements can also be discussed for domestic-foreign couples with forthcoming nuptials.
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