The United States has experienced a surge in immigrationsince 1970, and there are now approximately 45 million foreign-born peopleliving in the United States. Some of them have become U.S. citizens, but manynon-citizens live in the United States as well. In 2019 alone, approximately1,031,000 foreign nationals obtained lawful permanent resident status.[1] It is not onlypermissible, but essential for those individuals, like U.S. citizens, to haveestate plans in place. There are a number of special issues non-citizens mayneed to consider.
Property Located in AnotherCountry
It is possible that a non-U.S. citizen may own propertylocated in another country. This should be considered in designing his or herestate plan.
Common law vs. civil law
There are many differences in the law between countriessuch as the United States and the United Kingdom, which have common lawsystems, and countries such as Germany, France, or China, which have civil lawsystems. For example, common law countries recognize trusts, but civil lawcountries do not.
In addition, common law and civil law countries havedifferent rules regarding which country’s law will apply (e.g., in a common lawcountry, the jurisdiction where real estate is located governs its disposition,but under civil law, the law of the country of the deceased person’snationality or habitual residence may be the governing law).
These differences (and there are many more not discussedhere!) must be taken into account in determining the best options for estateplanning involving property located in other countries.
Wills and trusts
In the United States, wills and trusts are some of theinstruments most commonly used by individuals to distribute their money andproperty. However, when a non-citizen owns property in other countries, the lawof the country where the property is located may affect how it is distributed.In addition, if the property is located in another country, that country maynot accept a United States will as valid. Some foreign countries may recognizeit if it satisfies all of their legal formalities. However, other countriesnever recognize a will drafted in another country or recognize it only incertain special situations.
As a will created in the United States may not be legallyvalid in other countries, it may be necessary to have multiple wills, each onedealing only with money and property located in that country (and drafted bysomeone familiar with the local law). In addition, it is important for specialcare to be taken to make sure that none of the wills unintentionally revoke anypreviously drafted wills from another jurisdiction.
Another option is an international will. The UnitedStates and a limited number of other countries enacted the UniformInternational Will Act pursuant to the International Institute for theUnification of Private Law (UNIDROIT) convention. The Uniform InternationalWill Act establishes criteria that must be met for a legally effectiveinternational will. However, many countries have not signed on to theconvention and thus do not recognize international wills.
As mentioned above, civil law countries do not recognize trusts.As a result, trust-based estate planning may not work in some foreign countrieswhere real property or children who are beneficiaries are located. Further,civil law countries may treat a trust as an unrelated party and impose thehighest inheritance tax rate. In addition, some common law countries may imposetaxes on transfers to trusts or impose periodic taxes upon trust property.
TaxConsiderations for Non-Citizens
Property located abroad taxed inU.S. for U.S. residents
U.S. citizens, and non-citizenswho meet the IRS’s definition of a “resident” of the United States, are subjectto federal gift and estate taxes on all of their money and property, worldwide.However, U.S. residents can also benefit from the $11.58 million lifetime giftand estate tax exemption and the $15,000 gift tax annual exclusion. In general,a non-citizen is a permanent resident if he or she currently resides in theUnited States and intends to remain there indefinitely.
A permanent resident should also keep in mind that he or she must pay an exit tax (i.e., a capital gains tax on the appreciation of any property they own) upon giving up permanent resident status.
Different rules for non-residents
For non-residents, i.e., non-citizens who do not intend toremain in the United States, only money and property “situated” in the UnitedStates is subject to estate and gift tax in the United States. However, their estate tax exemption dropsfrom $11.58 million to $60,000, which could result in a very large estate taxbill if the non-resident has a lot of property located in the U.S. Moreover, they may also be subject to estate tax in their countryof citizenship, raising the issue of double taxation. The United States hasentered into anestate and/or gift tax treatywith a limited numberof countries allowing a citizen of one of the treaty countries who ownsproperty to avoid the possibility of both countries taxing the same asset atthe time of death.[2]
Special rulesfor non-citizen spouses
Unlimited marital deduction notavailable. A U.S.citizen who is married to a non-citizen should keep in mind that the unlimitedmarital deduction is not available for gifts or bequests to non-citizens, evenif the spouse is a permanent resident. If the spousereceiving the assets is not an U.S. citizen, the tax-free amount that can betransferred to a spouse is only $157,000 a year (in 2020). However,the unlimited marital deduction is available for transfers from a non-citizenspouse to a citizen spouse.
Tip: A non-citizen spouse can inherit from a U.S. citizen spousefree of estate tax if the U.S. citizen creates a special trust called aqualified domestic trust (QDOT). The U.S. citizen can leave property to thetrust, instead of directly to the non-citizen spouse. The spouse is thebeneficiary of the trust, and the trust cannot have any other beneficiarieswhile the non-citizen spouse is alive. The non-citizen spouse, as thebeneficiary of the trust, can receive the income that the trust propertygenerates without having to pay the estate tax. The estate tax on funds orproperty transferred to the QDOT will be deferred until the principal isdistributed. However, if a distribution is made because thenon-citizen spouse has an urgent, immediate need and has no other resourcesavailable, the principal may also be distributed to him or her withoutincurring estate tax liability. Further, if the non-citizen spouse eventuallybecomes a U.S. citizen, the principal can be distributed to that spouse withoutany further tax.
A QDOT must be established, and theproperty must be transferred to it, by the time the estate tax return of thedeceased spouse is due. Usually, it is set up while both spouses are alive andcomes into existence when the citizen spouse dies. The trustee—that is, the personor entity in charge of managing the trust assets—must be a U.S. citizen or aU.S. corporation such as a bank or trust company.
Jointlyowned property treated differently. If a married couple jointly owns ahome, it is assumed to belong to both spouses equally when both are U.S.citizens. This means that each of the spouses is considered to own a 50% shareof the home. However, if one of the spouses is not a citizen, this presumptiondoes not apply. For example, if the spouse who is a U.S. citizen dies first,and the jointly-owned home is worth $200,000, the entire $200,000—instead of$100,000—will be included in that spouse’s taxable estate unless thenon-citizen spouse proves he or she contributed a certain amount toward thepurchase of the home. Thus, if the non-citizen spouse made $50,000 in mortgagepayments, the amount included in the U.S. citizen spouse’s estate would only be$150,000. If the married couple buys property together, and the spouse who is aU.S. citizen pays the entire purchase price, 50% of the value of the propertywill be considered a gift to the non-citizen spouse.
WeCan Help
Estate planning for non-citizensis very complex. If you are a non-citizen or are married to a non-citizen, wecan help you think through all of the issues that may affect how you plan forthe future. Call us today so we can help ensure that all of your documents arevalid and enforceable, that proper planning is in place for property located inother countries, and that your estate and gift tax liability is minimized.
[1]Department of Homeland Security, “Legal Immigration and Adjustment of StatusReport Fiscal Year 2019, Quarter 4,” accessed March 16, 2020, https://www.dhs.gov/immigration-statistics/special-reports/legal-immigration
[2] Australia, Austria, Canada,Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands,NoRWay, South Africa, Sweden, Switzerland, and the United Kingdom.
Tagged with: estate planning, international will, living trust, qdot
Posted in: Estate Planning, Gifting, Taxes
