Estate planning with a non-citizen spouse

Estate planning with a non-citizen spouse

Estate planning, when not done in careful accordance with tax law, can lead to extremely high costs for high-net-worth individuals. Many of these costs can be easily mitigated or avoided entirely by taking advantage of the unlimited marital deduction, but this does not apply for individuals who are married to non-citizens, according to Market Watch.

The current estate tax is 40 percent of all holdings in excess of $5.34 million, according to Lexology. An individual with a net worth of $10.34 million who is married to a U.S. citizen, for example, might choose to avoid this effective tax of $2 million by bequeathing $5.34 million to his or her children and transferring the remaining $5 million to his or her spouse. There is no limit on tax-free gifts to spouses who are U.S. citizens, regardless of whether you are a citizen yourself.

However, if your spouse is a non-citizen, your options are more limited, according to MarketWatch. Your spouse can become a citizen by merit of his or her marriage with you, allowing him or her to take advantage of the unlimited marital deduction. He or she can attain complete citizenship even after your death, but no later than the due date for filing the federal estate tax return, which is typically nine months after your death.

For various reasons, your spouse may not want to become a citizen right now – some countries require renouncing citizenship with them before becoming a citizen of the U.S., for example, which can complicate holdings in those countries. If your spouse wishes to defer becoming a citizen for longer than nine months, the money can be put in a qualified domestic trust – also known as a QDOT – and withdrawn after he or she becomes a citizen.

The final option is to gradually transfer your estate to your non-citizen spouse while you are still alive, advises MarketWatch. In accordance with the tax law, you can gift him or her up to $145,000 per year without incurring tax penalties – substantially more than the standard tax-free gift size of $14,000 to other people.