Federal Taxes and the Non-Citizen Spouse
Most people don’t need to worry about the federal gift and estate tax, which affects only very wealthy families. Under current law, everyone gets to transfer $5.25 million of property without paying any gift and estate tax, which means that very few families pay the tax. Furthermore, assets left to a surviving spouse are not subject to federal estate tax, no matter how much they are worth. This rule is called the unlimited marital deduction. One caveat, however, is that the unlimited marital deduction does not apply when the surviving spouse is not a U.S. citizen, even if the spouse is a permanent U.S. resident.
Gifts Given During Life
If your spouse is a U.S. citizen, any gifts you give to them during your life are free of federal gift tax. If your spouse is not a U.S. citizen, however, the favorable tax-free treatment for spouses is limited to $143,000 a year (2013). But note, the $143,000 is in addition to the $5.25 million you can transfer to anyone without owing federal gift and/or estate tax.
Postponing or Avoiding Estate Taxes Upon Death
If you have substantial wealth and a non-citizen spouse, you should consider one of the following strategies to postpone or avoid federal estate taxes.
- Get Citizenship
If your spouse becomes a U.S. citizen by the time your estate’s federal estate tax return is due, he or she will qualify for the unlimited marital deduction. The return is generally due nine months after death, but the IRS may grant a six-month extension. Because it takes a long time to get citizenship, however, this isn’t an option for most people.
- Use a QDOT Trust
Your noncitizen spouse can inherit from you free of estate tax if you use a special trust, called a “qualified domestic trust” or QDOT. (Internal Revenue Code section 2056A.) You leave property to the trust, instead of directly to your spouse and name your spouse as the only beneficiary of the trust.
If your spouse receives income that the trust property generates, these amounts are not subject to estate tax. However, if trust assets themselves are distributed to your spouse, the estate tax will most likely have to be paid on that property. (Unless distribution is made due to a qualifying hardship).
A QDOT must be established, and the property must be transferred to it, by the time the estate tax return of the deceased spouse is due. Usually, it’s set up while both spouses are alive and comes into existence when the citizen spouse dies. And finally, the trustee must be a U.S. citizen or a U.S. corporation – such as a bank or trust company.
Transfers of wealth to non-citizen spouses involve complicated legal rules. Be sure to speak with an experienced estate planning lawyer to ensure compliance.