Traditional estate planning strategies generally are based on the assumption that all family members involved are U.S. citizens. However, if you or your spouse is a noncitizen, special rules apply that require additional planning. Let's take a look at how the rules change when one or more noncitizens are involved.
If you're a U.S. resident, but not a citizen, you're treated similarly to a U.S. citizen by the Internal Revenue Code. You're subject to federal gift and estate taxes on your worldwide assets, but you also enjoy the benefits of the estate tax exemption and the annual gift tax exclusion. And you can double the annual gift exclusion to through gift-splitting with your spouse, so long as your spouse is a U.S. citizen or resident. Special rules apply to the marital deduction, however, as will be discussed below. Click here to learn this year's estate tax exemption and gift tax exclusion.
Residency is a complicated subject. IRS regulations define a U.S. resident for federal estate tax purposes as someone who had his or her domicile in the United States at the time of death. One acquires a domicile in a place by living there, even briefly, with a present intention of making that place a permanent home.
Whether you have your domicile in the United States depends on an analysis of several factors, including the relative time you spend in the United States and abroad, the locations and relative values of your residences and business interests, visa status, community ties, and the location of family members.
If you're a nonresident alien — that is, if you're neither a U.S. citizen nor a U.S. resident — there's good news and bad news in regard to estate tax law. The good news is that you're subject to U.S. gift and estate taxes only on property that's "situated" in the United States. Also, you can take advantage of the annual gift exclusion (although you can't split gifts with your spouse).
The bad news is that your estate tax exemption is much lower, so substantial U.S. property holdings can result in a big estate tax bill. Taxable property includes U.S. real estate as well as tangible personal property — such as cars, boats and artwork — located in the United States.
Determining the location of intangible property — such as stocks, bonds, partnership interests or other equity or debt interests — is more complicated. For example, if a nonresident alien makes a gift of stock in a U.S. corporation, the gift is exempt from U.S. gift tax. But a bequest of that same stock at death is subject to estate tax. On the other hand, a gift of cash on deposit in a U.S. bank is subject to gift tax, while a bequest of the same cash would be exempt from estate tax.
The unlimited marital deduction isn't available for gifts or bequests to noncitizens. However, there are certain options for making tax-free transfers to a noncitizen spouse. For example, you can use the transferor's $12.92 million exemption (provided the transferor is a U.S. citizen or resident). You can also make annual exclusion gifts. (For 2024, the limit for gifts to a noncitizen spouse is $185,000, up from $175,000 in 2023.) And last, you can bequeath assets to a qualified domestic trust, which contains provisions designed to ensure that the assets are ultimately taxed as part of the recipient's estate.
Understanding federal estate tax laws can be complicated — even more so if you, your spouse or both are noncitizens. Discuss your options with your estate tax advisor.
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