If you or your spouse is a noncitizen, special rules apply when it comes to estate planning.
If you’re a U.S. resident, but not a citizen, you’re treated similarly to a U.S. citizen by the IRS. You’re subject to federal gift and estate taxes on your worldwide assets, but you also enjoy the benefits of the $5.45 million exemption and the $14,000 annual exclusion.
Residency, however, 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. You acquire a domicile in a place by living there, even briefly, with a present intention of making that place a permanent home.
No marital deduction for transfers to noncitizens
The unlimited marital deduction — which permits one spouse to transfer tax-free any amount of property to the other spouse during life or at death — isn’t available for gifts or bequests to noncitizens, even if they’re U.S. residents.
However, three options remain in place for making tax-free transfers to a noncitizen spouse:
- Use your $5.45 million exemption (provided you’re a U.S. citizen or resident).
- Make annual exclusion gifts (currently, the limit for gifts to a noncitizen spouse is $148,000).
- Bequeath assets to a qualified domestic trust, which contains provisions designed to ensure that the assets are ultimately taxed as part of the recipient’s estate.
Note that the marital deduction is available for transfers from a noncitizen spouse to a citizen spouse.
If you, your spouse, or both of you are not U.S. citizens, contact me at SDitman@berdonllp.com or your Berdon advisor to minimize estate tax liability. Estate planning is a complex issue, and there are further estate planning complications if either of you is a nonresident alien.
Scott T. Ditman, a tax partner and Chair, Personal Wealth Services at Berdon LLP, New York Accountants, advises high net worth individuals and family/owner-managed business clients on building, preserving, and transferring wealth, estate and income tax issues, and succession and financial planning.