In our globally interconnected world, so many in our community either hail from abroad or have family or property ties in foreign countries. These ties can have significant ramifications for estate planning. Many couples don’t realize that one of the most widely used estate planning techniques in the United States – the marital deduction – is not available for the benefit of a non-U.S. citizen spouse. There are also special rules for how much one spouse can gift to a non-U.S. citizen spouse in any given year versus an unlimited amount for a spouse who is a citizen. In addition, the location of one’s “domicile” can have a critical impact on the estate and lifetime gift tax exclusions available to a non-U.S. citizen.
At Rucci Law Group, we have experience with a myriad of issues affecting clients with international ties. With careful planning, many of these concerns can be mitigated, thereby preserving assets for the surviving spouse and protecting one’s estate for future generations.
Here a few things to consider:
The Marital Deduction
Under the unlimited marital deduction law, assets left to a surviving spouse upon one spouse’s death (no matter the value of those assets) are not subject to federal estate taxes – unless the surviving spouse is not a U.S. citizen. In that case, the deceased spouse can currently transfer up to $5.49 million (the “federal estate and gift tax exclusion amount”) to the surviving spouse without incurring federal estate tax. However, any amount in excess of the federal estate and gift tax exclusion amount would be taxed, thereby reducing the amount the surviving spouse would receive. If the non-citizen spouse dies first, the surviving citizen spouse will benefit from the unlimited marital deduction, and estate taxes, if any, would not be due until after the death of the surviving spouse.
Married couples are allowed to give unlimited gifts to their spouses during their lifetimes and pay no federal gift taxes. However, gifts to non-citizen spouses are limited to $149,000 per year in 2017 (over and above the annual $14,000 gift tax exclusion limit allowed for any recipient). Any amount transferred to a non-citizen spouse in excess of this amount will be counted against the transferor’s lifetime federal estate and gift tax exclusion amount or the transferor can choose to pay the gift tax on the amount over the permitted limit. These statutory gift limits are indexed to inflation and can change yearly.
States don’t necessarily follow the federal tax rules and may impose separate inheritance and/or estate taxes. Connecticut has its own estate and gift tax exclusion amount, currently set at $2.6 million per person through the end of 2018. This lower threshold makes it extremely important for married couples to plan properly to make sure they get the benefit of each spouse’s exclusion amount.
Estate Planning Tools
For people who are concerned that estate tax rules for non-citizen spouses will negatively affect their ability to efficiently transfer their estates, there may be other options, including seeking U.S. citizenship or establishing a Qualified Domestic Trust. We can explore these and other options with you.
As potential changes in the tax code and immigration laws work their way through Congress this fall, it is more important than ever to make sure your estate plans are up to date and take into account beneficiaries with non-citizen status. Rucci Law Group can help ensure your family is prepared.