When a person is married to a non-citizen spouse, there are some specific estate planning issues that person must address through his or her estate plan. Non-citizen estate planning issues primarily surround the application of the federal estate tax. While this tax will not apply to the majority of Americans, wealthy people who are married to non-citizens need to understand the issue and plan accordingly.
Estate Taxes, Marital Deductions, and Non-Citizen Spouses
The key problem with an estate plan for someone who is married to a non-citizen comes with the estate tax. As you might already know, the federal estate tax applies to the property left behind by a deceased person. If someone dies leaving behind property in excess of a specific amount ($5.43 million for estates of those who die in 2015), that estate will have to pay a tax to the federal government.
For spouses who have estates worth more than the $5.43 individual exemption amount, avoiding estate taxes is often very simple because of the unlimited marital deduction. Put simply, spouses can leave unlimited inheritances to each other without those inheritances being subject to the estate tax. So, for example, if you have an estate worth $15.43 million, you can leave $5.43 million to your children and $10 million to your spouse, and your estate will still not have to pay any money in estate taxes.
But the same is not true for non-citizen spouses. The unlimited marital deduction only applies to citizen spouses. If your spouse is a non-citizen, there is no unlimited marital deduction.
Getting Around the Non-Citizen Spouse Estate Tax Issues
The simplest way to avoid and estate tax issues with a non-citizen spouse is for that spouse to become a citizen. Non-citizen spouses can even become citizens after their citizen spouses have died and still receive the benefit of the unlimited deduction, as long as it happens no later than about 9 months after the spouse’s death.
However, becoming a citizen is not always the best option. For situations where a non-citizen spouse does not want to become an American citizen, other options are available. For example, using a carefully developed gift plan can often reduce the size of your taxable estate and provide your spouse with lifetimes gifts.
Another possibility includes the creation of a qualified domestic trust, or DQOT. This kind of trust can effectively delay or defer the payment of any estate taxes, though it doesn’t reduce the amount that must be paid.
If you are married to a non-citizen, talk to your estate planning attorney as soon as possible. As long as you are aware of the issues you might face, you can create a plan that protects you, your spouse, and your estate.