I am a United States citizen living in Davis, but my wife and daughter are both resident aliens, “green card” holders of many years. I intend to leave my property to my wife as part of my estate plan, but I am worried about the tax consequences. I have read that my wife and my daughter will not get the same tax treatment as they would if they were citizens. Should I be worried? How should I plan?
The amount of money and property you plan to leave behind to your non-citizen spouse should determine the level of your concern. For transfers between citizens and non-citizens, there is a complex set of rules to determine whether a transfer may be a “taxable event.” Even the transfers that you are making while both of you are living, may have tax consequences.
In general, the estate tax laws apply to transfers of property before and after death. The United States has a unified estate and gift tax. If you gift more than $14,000 per year to one person, then you must file a “709 Gift Tax Return” reporting the gift to the IRS. This gift reduces the amount of exemption you have left from the estate tax when you die.
Fortunately, the estate and gift tax exemption is quite high. The present amount of the estate tax exemption is $5.45 million per person. In other words, you can give $5.45 million to a citizen or non-citizen without any estate tax whatsoever. If your estate is far less than that amount, you have little to worry about. If your estate is greater than that amount, you will want to seek the advice of an experienced trust and estate attorney, who can advise you on your options.
For a marriage of two U.S. citizens, the death of the first spouse will not result in a taxable event. The unlimited “marital deduction” allows one spouse to take the entirety of the couple’s estate. Assuming that the estate is large enough to incur tax liability, the marital deduction allows for the payment of any estate tax to be deferred until the death of the surviving spouse. But our government fears that a non-citizen spouse who inherits an estate with future tax liability may pack up and move to his or her native country. So the government does not allow for a marital deduction by a non-citizen spouse and demands that the estate tax bill be paid in the event the non-citizen spouse has more than $5.45 million in assets.
There are ways for a non-citizen spouse who continues to reside in the United States to avoid the immediate estate tax effects after the death of the citizen spouse. For example, if the surviving spouse becomes a citizen by the time an estate tax return is due (nine months after the death of the deceased spouse), the surviving spouse will qualify for the unlimited marital deduction. But considering the length of time naturalization takes, this is typically not a viable option after the death of a spouse. But if you suspect future estate tax issues, it may make sense to pursue citizenship now.
A more common example is the creation of a “Qualified Domestic Transfer” or “QDOT” trust. Under a QDOT trust, the property from the deceased citizen spouse goes into a trust that the non-citizen spouse can use for the remainder of his or her life. The estate tax is ultimately paid on the death of the surviving spouse. Setting up a QDOT trust can be done either before the death of the citizen spouse or even after death by the non-citizen spouse so long as certain timing requirements are met. The rules of administration can be complex and any non-citizen spouse who inherits a taxable estate should seek the assistance of an attorney in this task.
Even though your question deals with what a citizen spouse leaves to a non-citizen spouse, you should know that the rules above do not present the same concern to you as a citizen. A citizen qualifies for the marital deduction. So if your non-citizen spouse predeceases you and leaves property to you here, you will not have to set the same sort of complicated QDOT trust plan to avoid the present payment of estate taxes. In other words, citizenship has its privileges.