U.S. citizens and non-citizens are subject to U.S. tax laws. However, U.S. citizens receive certain tax benefits throughout their lives and even upon their death by virtue of their status as citizens. Non-citizens do not enjoy all of these benefits, particularly when it comes to estate planning. As a result, non-citizens should work closely with an attorney to carefully plan their estate to avoid adverse tax consequences when they pass away.
Tax Residency Rules
U.S. citizens and lawful permanent residents domiciled in the U.S. are subject to estate and gift taxation at a maximum rate of 40%. However, they also benefit from a federal exemption of $13.6 million in 2024.
Non-citizens who are not domiciled in the U.S. are subject to the same tax rate but, unless they are a domiciliary of a country that has entered into a treaty with the U.S. that provides for a different result, are limited to an exemption of only $60,000.
The IRS uses a “facts and circumstances” test to determine a person’s domicile for estate tax purposes. Key factors include how long the individual has resided in the U.S., whether he or she has a green card, and where church affiliations, voting registration, and driver’s licenses are maintained.
Marital Deduction Rules
One of the biggest tax planning advantages available to U.S. citizens is the marital deduction. If the surviving spouse is a U.S. citizen, there is an unlimited marital deduction, meaning that an unlimited amount of assets can pass to the spouse without being subject to U.S. estate tax.
Further, an election can be made on a timely filed estate tax return to pass any unused exemption amount to the surviving spouse to be used at the time of his or her death. For example, if the estate of the first spouse was $10 million ($3.6 million less than the 2024 exemption amount), the surviving spouse won’t have to pay any estate tax because the value of the estate is below the exemption amount. More importantly, if later the surviving spouse dies and his or her estate is now over the exemption amount, the estate can apply the $3.6 million unused exemption amount to reduce the size of the surviving spouse’s estate, minimizing any estate tax that would have to be paid.
However, if the surviving spouse is not a U.S. citizen, the marital deduction is generally not allowed and the estate tax exemption cannot be passed to the spouse without engaging in special planning. Notably, for purposes of the marital deduction, it doesn’t matter whether the surviving spouse is a permanent resident domiciled in the U.S. The surviving spouse must be a U.S. citizen to get the deduction.
Qualified Domestic Trust (QDOT)
To address the potential loss of the marital deduction, a QDOT can be created which allows a non-citizen spouse to take advantage of the marital deduction. The married couple’s estate plan must provide that the citizen spouse’s property passes into the QDOT upon death. This allows a deferral of estate taxes for the assets passed from the deceased citizen to the non-citizen. While a QDOT is a useful estate planning tool, there are very specific requirements for a trust to be considered a QDOT. Accordingly,a consultation with an attorney is highly recommended.
If you or your spouse is a non-citizen, contact us to learn how we can assist you with your estate planning. Our firm has extensive experience helping clients develop a comprehensive estate plan tailored to their needs and goals.
