Non-Citizen Spouses and Estate Planning

What legal issues will you face if you are married to a noncitizen or planning on leaving part of your estate to a noncitizen? The answer to this question is not as easy as one might think. Noncitizens do not necessarily escape the United States’ estate tax, nor do they always qualify for some of the deductions given to US citizens.

The imposition of the estate tax on noncitizens is largely dependent on where the noncitizen is domiciled. There is an estate tax levied on the worldwide net estate of domiciled noncitizens. In contrast, the estate tax is only levied on the US property of non-domiciled noncitizens. Therefore, a crucial issue is determining whether or not a noncitizen is considered domiciled. Domicile is generally determined by whether a person is living in the United States and whether that person has the intent to remain in the country. Intent is a subjective judgment based on weighing the individual facts of a situation. Residency does not necessarily mean domicile, nor is it a requirement of domicile for estate tax purposes. This means a US vacation home left to a non-domiciled noncitizen would be includable in their gross estate. Property is not limited to real property in this scenario, but can also include things such as stock in a US corporation and even certain assets.

Having a noncitizen spouse can further complicate estate planning. There is no marital deduction for lifetime gifts to noncitizen spouses. Estates of nonresident aliens have the choice of claiming either the marital deduction (if any) allowed by treaty between the United States and the applicable foreign country or that allowed under the QDOT rules. Reg. § 20.2056A-1(c). QDOT is a Qualifying Domestic Trust. Similar to the QTIP trust for citizen spouses, a QDOT trust allows taxpayers who are noncitizens to claim the marital deduction for estate-tax purposes. To qualify as a QDOT trust, the trust must meet certain requirements set out by the IRS. IRC § 2056A(a); Reg. § 20.2056A-2(b)(1).

As simple as all of that might seem, the QDOT trust is not a perfect solution to claiming a marital deduction for a noncitizen spouse. The QDOT can severely limit the use of assets by the surviving noncitizen spouse. Distributions of principal that do not qualify for “hardship” can be very expensive. The ability to transfer is also limited for the surviving noncitizen spouse.

If you are planning on including noncitizens in your estate plan, attorneys at Chepenik Trushin LLP can help. Please feel free to call (305) 981-8889 for an initial consultation.