Many people think of the estate tax as something that only applies to the very wealthy, but couples of all income levels can be hit hard by this tax, especially if one or both spouses are not US citizens. That’s because the exemptions available to US citizens are not always applicable to non-citizens, which means estates as modest as $60,000 can be hit with estate taxes.
For this reason, it’s crucial to understand how estate taxes are assessed so one can plan appropriately.
US Citizen Couple
When both spouses are US citizens, the federal estate tax only applies to those with an excess of $11.58 million1 as of 2020 (expected to shrink to $5.49 million2 in 2026). But it’s possible to avoid paying estate taxes (even on larger estates), since a US citizen can bequeath an unlimited amount to a US citizen spouse without incurring any tax whatsoever.
For example, a person with a $15 million estate could bequeath $11.58 million to various relatives and charities and leave the rest to his or her spouse and owe $0 in federal estate tax.
Non-US Citizen Spouse
A US citizen with a non-citizen spouse retains the $11.58 million exemption from the example above but loses the unlimited marital deduction. So, the hypothetical $15 million estate that was tax-free incurs a federal tax of $1.368 million (40 percent x $3.42 million), no matter how the estate is distributed.
Non-US Citizen Couple
This is where the situation gets thorny. For couples where neither spouse is a US citizen, the crucial factor is the subjective concept of “domicile” within the United States. For federal estate tax purposes, a “US resident decedent” is defined as a person who had his or her domicile in the United States at the time of death “with no definite present intention to live elsewhere.”
In practice, a person’s nonimmigrant visa status (as opposed to their tax status) is often the deciding factor in determining whether they qualify for US domicile treatment, as shown in these examples.
- A non-US citizen with US domicile (e.g., a person with permanent residency, also known as a green card) will be entitled to the federal basic exemption of $11.58 million. Only the unlimited marital deduction will not be applicable if the spouse is not a US citizen.
- A non-US citizen without US domicile (e.g., a foreign-born person who has lived in the US for a few years under a visa with an expat contract) will not be granted the federal basic exemption. Since this person has a temporary work authorization, it is assumed that the person has an intent to live elsewhere in the future. Therefore, the estate will only get a $60,000 exemption, and the spouse won’t be entitled to the unlimited marital deduction.
In this case, the hypothetical $15 million estate would incur a whopping $5.976 million in federal estate tax ($14.94 million x 40 percent).
And it gets worse! If the surviving spouse is a non-US citizen, all jointly owned assets are considered to belong 100 percent to the spouse that passed away, meaning it could be necessary to sell the surviving spouse’s primary residence just to pay the estate tax on it.
So how can one get around the estate tax dilemma? Here are some possible strategic workarounds.
- Explore obtaining US citizenship. The non-citizen spouse can explore obtaining US citizenship. This is an option even after the death of the spouse with US citizenship, as long as the other spouse attains citizenship by the due date for filing the estate-tax return (typically nine months after death).
- Gradually reduce the taxable estate. During life, one can make substantial gifts to a non-citizen spouse on an annual basis. Such gifts are eligible for a larger-than-normal annual gift tax exclusion3 of $157,000 (as of 2020) for a non-citizen spouse, compared to the $15,000 exclusion for gifts to all other people.
- Establish a qualified domestic trust (QDOT). The QDOT can be formed by the terms of the will, the executor of the estate, or the surviving spouse. Basically, the inherited assets go into the QDOT, and the federal estate tax is deferred until the spouse withdraws principal from the QDOT or dies. Or, if the surviving spouse becomes a citizen at some point in the future, he or she can take all the assets in the QDOT, and the deferred tax bill will disappear.
With roughly 1.7 million people4 living in the United States on temporary work visas at any one time, the risk of triggering a high estate tax is very real for many people. Even worse, most wrongly assume they would be entitled to the much higher deduction available to US citizens.
Fortunately, with awareness and advanced planning, it is usually possible to minimize estate tax burdens and avoid leaving your loved ones with a huge tax bill.
- IRS, Estate Tax.
- IRS, Treasury, IRS: Making large gifts now won’t harm estates after 2025.
- IRS, Frequently Asked Questions on Gift Taxes for Nonresidents not Citizens of the United States.
- National Conference of State Legislatures, Snapshot of US Immigration 2019.
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