In this article we are going to review several notable estate planning issues for non-citizens married to US citizens.
The United States has experienced a surge in immigration since 1970 where each year more foreign nationals obtain lawful permanent resident status. For all those individuals, as well as for US citizens, it is essential to have estate plans in place. However, there are several special issues non-citizens will need to consider as they move forward.
Let’s take a look at specific points to consider when considering estate planning for non US citizens.
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The importance of estate planning for non US citizens in New York
If you own property located in the US but are not a permanent resident or US citizen, you cannot claim the same tax advantages as citizens. The consequence is that you may end up facing estate taxes right away if your spouse dies.
For tax purposes, permanent residents (Green Card holders) are considered almost identical to US citizens. These individuals will be required to pay US tax on income earned anywhere in the world and also tax on US estates and gifts they own anywhere in the world.
If you are interested in estate planning for non-US citizens, you may also be interested in estate planning for unmarried couples or wondering if you have to be a citizen to file for bankruptcy. As experienced New York bankruptcy lawyers, we have the answer to all of this on our blog.
Can Non-citizens Inherit Property?
Yes, non-citizens can inherit property just as citizens can. There is no problem with naming your non-citizen spouse when you make your will or living trust, name beneficiaries for your life insurance policies or retirement accounts.
It is crucial for permanent residents who lose their citizen spouses to understand the tax implications of receiving assets from the deceased spouse.
- In married couples where both individuals are US citizens there is no problem in transferring assets between them without paying inheritance and gift taxes. This is due to the US marital deduction for assets passed between spouses.
- However, if the spouse receiving the property is not a US citizen, they will be limited in the amount they can transfer without being taxed.
- Green Card holders can transfer a certain amount without paying US estate taxes but are subject to US estate taxes on assets they own anywhere in the world.
For 2022, the federal estate tax exemption amount is $12,060,000; but there are also individual state exemptions to consider: New York’s estate tax exemption amount is $6,110,000.
However, if a Qualified Domestic Trust (QDOT) is used for any trust created under a Last Will and Testament, the Unlimited Marital Deduction election can also be made for a non US citizen.
Note: Unless the home country of the Green Card holder and the United States have agreed to the terms of a treaty addressing estate tax, the Green Card holder may be subject and forced to pay estate tax in their home country. Treaties may also reduce or completely eliminate taxes on property in the US owned by a non-resident.
Other tax considerations for non-citizens
Tax free annual gifts in 2022 to anyone other than a spouse are limited to $16,000 per year.
If both spouses are US citizens, an unlimited amount of property can be given without incurring a gift tax.
The federal government has a hybrid approach in those cases where a client’s spouse is a non US citizen. In 2022 you can transfer $164,000 to a non-citizen spouse.
Permanent residents should also keep in mind that they must pay an exit tax if they give up their permanent resident status as we will cover later on the blog.
Note: It is often advantageous to place assets in a spouse’s name to use their tax exemptions. It is important to begin planning early because the type of asset allocation that US citizens could accomplish tax free in a day may take years.
Common law vs. civil law
There is a big difference in the law between countries like the United States and the UK which have common law systems and countries like France, China or Germany which have a civil law system.
- A clear example are trusts since common law countries recognize trusts, but civil law countries do not.
- Civil law and common law countries also differ regarding which country’s law will apply. For example, in a common-law country the jurisdiction where real estate is located governs how the real estate is dealt with. On the other hand, under civil law, the law of the country of the deceased person’s nationality or primary residence may hold precedence.
These and other differences must be taken into account when administering estate planning for non US citizens involving property located in foreign countries.
Wills and Trusts
In the US, trusts and wills are often used to distribute money and property. However, in the scenario where a non-citizen owns property in other countries, the law of the country where the property is located is key and could affect how it is distributed.
That country may not accept a will in the US as valid:
- Some countries may recognize the will as valid if you follow their legal formalities.
- Other countries never recognize a will drawn up in another country or only recognize it in special situations.
You may need multiple wills detailing only assets located in that country and drawn up by someone who knows the local law or you can make use of an international will.
The United States and a few other countries enacted the Uniform International Will Act pursuant to the International Institute for the Unification of Private Law (UNIDROIT) that establishes the criteria that must be met for an international will.
Note: Since civil law countries don’t recognize trusts, a trust-based estate planning may not cross borders effectively. Also consider the fact that civil law countries may also treat a trust as an unrelated party, therefore, imposing their highest inheritance tax rate. It is worth mentioning also that some common law countries may impose taxes on transfers to trusts or periodic taxes upon trust property.
The exit tax is basically a capital gains tax on any asset appreciation provided the asset is owned by a permanent resident.
In other words, these taxes refer to those that must be paid by permanent residents when renouncing the classification as a permanent resident.
This point is important because if a citizen spouse dies, the surviving permanent resident spouse who decides to return to their country of origin may have to pay an exit tax.
The US government is concerned that the permanent resident spouse will return to their home country to live the rest of that person’s life and they will not be able to collect taxes. This causes that when one of the two spouses is a permanent resident, estate taxes might become due as soon as possible after the death of the citizen.
Estate planning risks for non US citizens
- The imposition of a gift tax will result from asset transfers between spouses under the annual exemption amount for non-US citizens.
- You may also be required to pay a combined 45% state tax upon the death of the first spouse.
- Upon the surviving spouse’s death, life insurance owned by the other spouse to avoid inclusion in the insured’s estate may be taxed.
- In case of incapacity there may be complications in a conservatorship proceeding.
- A court could restrict US citizen children from exiting the United States to be reunited with foreign guardians.
How Can our Estate Planning Attorney Help?
As you can see, for non-US citizens the estate planning rules are different. Proper estate planning for non US citizens can greatly reduce the incidence of the United States estate tax for non US citizens – nonresident aliens and permanent residents – by taking advantage of certain structures and estate planning techniques, such as pre immigration planning, offshore trust planning and debt financed real estate.
Ortiz & Ortiz is a New York financial law firm with over 30 years of experience in estate planning matters, bankruptcy and business law. With offices located in Astoria, Brooklyn and Manhattan we are vastly experienced and ready to take your case. Get in touch with us and let us know the factual details surrounding your case so we can plan the next steps.