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.