Non-citizens, including resident Green Card holders who are married to U.S. citizens, are treated differently for estate and gift tax purposes than U.S. persons.

Without proper planning, non-citizens may be subject to unexpected and substantial tax liabilities. This adds complexity to the estate planning process, so partnering with the right team of advisors is critical.

Estate Tax Planning

When embarking on the estate planning process, many people focus on who to leave their assets to and who best to name as a fiduciary. But they may not give as much thought to the income, estate and gift tax regulations that are the backbone of a well-crafted estate plan. When one or both spouses are not U.S. citizens, their status may have a major impact on the estate and gift tax picture.

One key element of estate planning is transferring wealth to minimize estate tax exposure. For estate and gift tax purposes, many rely on the marital deduction. This allows a person to give unlimited assets to a spouse during his or her lifetime without triggering a gift tax, and leave unlimited assets to the spouse at the time of the first death without owing estate tax or using up any estate tax exemption.

Unlike the estate and gift tax exemption, which both citizens and Green Card holders can use to make transfers, the marital deduction only applies to U.S. citizens. If you are a citizen married to a Green Card holder, you may not utilize the marital deduction. Rather, you are limited to what can be given to your spouse tax free during your lifetime (in the form of annual gifting)  and upon your death ($175,000 in 2023).

Consulting with your team of professionals (tax, estate planning and wealth management), well versed in planning for non-citizens, regarding asset transfers to a non-citizen spouse is crucial to assuring an efficient transfer of assets.

Consequences of Assets Held Outside the U.S.

When engaging in the planning process, it is important to take an inventory of assets you and your spouse have and identify where they are and how they might be taxed. Assessing how assets are taxed is generally easy for assets held in the U.S. but less so for assets held outside the U.S. There may be income and/or transfer taxes associated with assets held outside the U.S., potentially exposing individuals and their estates to liabilities in two or more countries. Although the U.S. does have tax treaties with several countries to ensure assets are not taxed twice.

Determining how foreign assets are transferred may also require a set of planning documents in the country where the assets are housed. Engaging counsel in the U.S. and in the country where the assets are held is an important component of the planning process. Assembling advisory teams in both regions – even though this may seem more complex and costly than relying on a single team to handle your planning concerns – will help avoid tax issues and non-compliance.

If you or your spouse is a Green Card holder, you are considered a resident for income tax purposes and are required to file a tax return on all income, not just income derived from assets in the U.S. Thus, regular consultations with your advisors regarding adequate and appropriate reporting may be helpful in the planning process.

The Tax Benefits of U.S. Citizenship

If you or your spouse are currently a Green Card holder and you intend to remain in the U.S. long-term, consider pursuing citizenship. Becoming a citizen can make you eligible for tax benefits, such as the marital deduction, allowing you to incorporate the deduction into your estate planning strategies and avoid incurring gift taxes when transferring assets to one another.

If you don’t intend to become a citizen or are in the process but are not yet a citizen, your estate planning documents should contain language allowing you to leave assets in trust for the benefit of your non-citizen spouse during their lifetime without a transfer tax consequence. This language is called a qualified domestic trust (“QDOT”) provision.

Build the Right Team

Any time there’s an element of international tax exposure, assembling the right team of advisors is key. Once your team is assembled, transparency about your assets, your income and the residency status of you and your family will allow your team to build the appropriate plan.

Partnering with advisors who understand the unique complexities of your wealth planning needs, the tax laws in the U.S. and your home country, as well as any treaties that may exist between them, is foundational to growing and protecting your wealth.  Reach out to Crestwood for help as you begin this journey.

 

The information contained in this document is provided by Crestwood Advisers Group, LLC (“Crestwood”) for general informational purposes only. For estate planning advice, consult with your advisers. Crestwood is not a law firm and does not provide legal advice. Crestwood is not a CPA firm and does not provide audit or attest services.

We all know and love someone that struggles, be it with mental health, addiction, learning disabilities or other special needs and challenges. While these issues hit close to home for nearly every family, there is often a hesitancy to discuss them openly and honestly.

Planning for loved ones who face challenges in their everyday lives is critical, but families are often reluctant to face these issues head-on when they meet with their advisors to discuss estate and financial planning. Anxiety affects open communication surrounding these issues as clients wonder how it will affect them, their children, their families and their legacy.

The hesitation to communicate openly is often meant to protect loved ones, but failure to discuss these matters when structuring your estate and financial plan can have dire consequences for those loved ones you are trying to protect. To carefully craft an estate and financial plan, it is imperative for families to share pertinent details about their lives and loved ones with their team of advisors, even if that means sharing their perceived “skeletons in the closet.”

Communication is Key

Talking about your money and your family requires a great deal of trust. This trust relies on a family’s ability to view their advisor not just as a subject matter expert but perhaps more importantly as a human being. An advisor who is willing to share their own experiences — whether firsthand or through helping other families — is better able to convey their knowledge of the myriad ways mental health, addiction, special needs and other issues can affect families. Providing a human element helps calm nerves and encourages open communication.

Just as transparency with your advisors is important, so too is communication with your beneficiaries, to the extent advisable and appropriate. Allowing your beneficiaries to take part in family discussions empowers them to feel they are part of the process and not simply being controlled by parents or other loved ones. These beneficiaries may need to be protected from themselves and others, but they also need to be confident that their advisors and fiduciaries will support them and have their best interests in mind.

Through open and transparent communication, the advisor can gain a better understanding of the family dynamics and needs. Sharing pertinent details like the beneficiary’s living situation, whether he or she receives state or federal benefits and programs the person attends, will allow the advisor to create a plan that will support and protect the beneficiary while aligning with the grantor’s intentions.

Fiduciary Selection

When choosing a fiduciary – such as a trustee, personal representative or conservator – people often appoint a sibling, an adult child or a family friend. This may seem like a good idea as it is cost-effective and more personal.

However, when we need to administer assets for a loved one with special circumstances, it can get complicated. Placing a loved one in this position may lead to difficulty gaining enough emotional distance to help the beneficiary obtain the most prompt and proper treatment, and it could potentially encourage resentment by the loved one serving as a fiduciary, the beneficiary or both.

Typically, parents do not want to place an undue burden on other children when they, as parents, are no longer available to mediate. Using a corporate fiduciary or an objective third party removes the emotional and family dynamic and alleviates the burden of placing a loved one in trying circumstances.

Another possibility that many families in similar situations embrace is a hybrid approach where a family member and a corporate trustee act as co-fiduciaries. This works well when there is a sibling who really understands and can communicate easily with the beneficiary. The hybrid approach leverages this relationship while removing the considerable time commitment and pressure of making decisions that could adversely affect the relationship. This approach allows the corporate trustee to do the heavy lifting while also having a family member on board to represent the family.

The Importance of Education

Educating your children and other beneficiaries about special planning circumstances and why you made the planning choices you did will ease the administrative burden.

While families may believe they are protecting their loved ones, not giving your team of advisors the information they need to thoughtfully plan for the beneficiary, regardless of what they may be struggling with, can result in inadequate planning and unintended harmful consequences. The sooner families open up and start talking, the less stigmatized the beneficiaries — and the entire family — can be. Even if a beneficiary challenges certain aspects of his or her care, open communication will lead to a faster resolution.

At Crestwood, we can help facilitate these conversations and shepherd families throughout the entire process to ensure the generational wealth transfer goals are met while supporting the holistic needs of the family.