Estate Planning for Non-U.S. Citizens

A non-U.S. citizen owning property in the U.S. needs an estate plan.
There are a number of special estate planning issues a non-U.S. citizen needs to consider.

The United States has experienced a surge in immigration since 1970, and there are now approximately 45 million foreign-born people living in the United States. Some of them have become U.S. citizens, but many non-citizens live in the United States as well. See https://www.dhs.gov/immigration-statistics/special-reports/legal-immigration. Like U.S. citizens, it is essential for non-U.S. citizens to have estate plans in place. But there are also a number of special issues non-U.S. citizens need to consider.

Common law vs. civil law

There are many differences in the law between countries such as the United States and the United Kingdom, which have common law systems, and countries such as Germany, France, or China, which have civil law systems. For example, common law countries recognize trusts, but civil law countries do not.

In addition, common law and civil law countries have different rules regarding which country’s law will apply (e.g., in a common law country, the jurisdiction where real estate is located governs its disposition, but under civil law, the law of the country of the deceased person’s nationality or habitual residence may be the governing law).

These differences (and there are many more not discussed here!) must be taken into account in determining the best options for estate planning involving property located in other countries.

Wills and trusts

In the United States, wills and trusts are some of the instruments most commonly used by individuals to distribute their money and property. However, when a non-citizen owns property in other countries, the law of 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 may not accept a United States will as valid. Some foreign countries may recognize it if it satisfies all of their legal formalities. However, other countries never recognize a will drafted in another country or recognize it only in certain special situations.

As a will created in the United States may not be legally valid in other countries, it may be necessary to have multiple wills, each one dealing only with money and property located in that country (and drafted by someone familiar with the local law). In addition, it is important for special care to be taken to make sure that none of the wills unintentionally revoke any previously drafted wills from another jurisdiction.

Tax Considerations for Non-Citizens

Property located abroad taxed in U.S. for U.S. residents

U.S. citizens, and non-citizens who meet the IRS’s definition of a “resident” of the United States, are subject to 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 gift and 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 the United States and intends to remain there indefinitely.

Different rules for non-residents

For non-residents, i.e., non-citizens who do not intend to remain in the United States, only money and property “situated” in the United States is subject to estate and gift tax in the United States. However, their estate tax exemption drops from $11.58 million to $60,000, which could result in a very large estate tax bill 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 country of citizenship, raising the issue of double taxation. The United States has entered into an estate and/or gift tax treaty with a limited number of countries allowing a citizen of one of the treaty countries who owns property to avoid the possibility of both countries taxing the same asset at the time of death.

Special rules for non-citizen spouses

Unlimited marital deduction not available. A U.S. citizen who is married to a non-citizen should keep in mind that the unlimited marital deduction is not available for gifts or bequests to non-citizens, even if the spouse is a permanent resident. If the spouse receiving the assets is not an U.S. citizen, the tax-free amount that can be transferred to a spouse is only $157,000 a year (in 2020).  However, the unlimited marital deduction is available for transfers from a non-citizen spouse to a citizen spouse.

Tip: A non-citizen spouse can inherit from a U.S. citizen spouse free of estate tax if the U.S. citizen creates a special trust called a qualified domestic trust (QDOT). The U.S. citizen can leave property to the trust, instead of directly to the non-citizen spouse, with special rules applying as to who can be Trustee and how distribution may be made.

Estate planning for non-U.S. citizens is very complex. If you are a non-citizen or are married to a non-citizen, an experienced estate planning attorney can help you think through all of the issues that may affect how you plan for the future.

This article references that wills and trusts are commonly used in the United States to transfer assets at death. If you are interested in learning more about Wills and living trusts see https://www.galliganmanning.com/will-vs-living-trust-a-quick-and-simple-reference-guide/

 

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Locking in a Deceased Spouse’s Unused Federal Estate Tax Exemption

Preserving a deceased spouse’s unused federal estate tax exemption may protect the survivor’s estate from huge taxes if the exemption lowers.

Coping with the death of a spouse is one of life’s biggest challenges.  In addition to the emotional toll, there are many small details that need to be addressed with accounts, finances, taxes and other matters.  One thing that should be considered is locking in the deceased spouse’s unused federal estate tax exemption, says a recent article from Forbes titled “4 Things You Should Know About The Death Tax Exemption.”

The deceased spouse unused exemption (DSUE) is the amount of federal estate tax exemption the spouse’s estate did not use when they passed away. When a person dies, a federal estate tax, known also as the “death” tax, is imposed on any assets over a certain amount. The estate tax exemption amount covers the assets that fall below that amount.  If you properly elect to us it, the DSUE amount can be used by the surviving spouse in their own estate along with their own personal tax exemption.  If you want a longer primer on the estate tax for reading this article, see here:  https://www.galliganmanning.com/what-exactly-is-the-estate-tax/

The threshold has changed over the years. It is at a historically high level of $11,580,000 in 2020 and is indexed to inflation, so it goes up slightly each year.  However, the current law will sunset in 2026, when it will drop to $5 million (adjusted for inflation), and as the federal government needs to pay for COVID-related costs, it is likely to drop sooner and possibly lower.

The DSUE is locked in when you file your deceased spouses’ estate tax return timely.  It is due nine (9) months after the date of death, but may be extended in some cases for up to two (2) years after death. If a spouse died in 2020 with the current exemption of $11,580,000 in place and used up $6,580,000 of the exemption amount, the surviving spouse will be able to add $5,000,000 to their exemption amount by filing the estate tax return appropriately.

The surviving spouse would then have their own $11,580,000 exemption (or whatever is appropriate in the year they pass), plus the $5,000,000 from the deceased spouse’s exemptions. As the current tax rate is 40% for amounts over the exemption, this is an exceptional tax benefit for high networth families, especially if the tax exemption plummets in future years.

I’ve said this a few times but it bears repeating: even if a spouse leaves all of their assets to their spouse and no federal estate taxes are due, an estate tax return still needs to be filed, if the surviving spouse is to lock in the DSUE. If the surviving spouse does not file an estate tax return in a timely fashion, the DSUE will be lost. The estate tax savings to the heirs could be in the millions.

If the estate tax exemption drops to prior levels, such as $3,500,000 which has been proposed in recent years, the family will still be able to claim the DSUE when the second spouse dies. This could be a big help for heirs in reducing or eliminating taxes on the second spouse’s estate. Many people may not have an estate worth $11 million, but by adding up the value of a home, retirement accounts, life insurance and other assets, a $5 million level of assets is not unheard of, and may be over the future exemption amount.

Your estate planning attorney will be able to analyze the federal estate taxes to achieve the best possible outcome for you and your spouse.

Reference: Forbes (Aug. 17, 2020) “4 Things You Should Know About The Death Tax Exemption”

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Can I Protect My Estate with Life Insurance?

Life insurance is a powerful estate planning tool which protects the estate by providing liquidity to preserve assets and to pay estate taxes and expenses.

With proper planning, insurance money can pay expenses, such as estate tax and keep other assets intact, says FedWeek’s article entitled “Protect Your Estate With Life Insurance.”

The article provides the story of “Bill” as an example. He dies and leaves a large estate to his daughter Julia. There are significant estate taxes due. However, most of Bill’s assets are tied up in real estate and an IRA. Julia may not want to hurry into a forced sale of the real estate. If she taps the inherited IRA to raise cash, she’ll be forced to pay income tax on the withdrawal and lose a valuable opportunity for extended tax deferral.

A wise move for Bill would be to purchase life insurance on his own life. The policy’s proceeds could be used to pay the estate tax bill. Julia will then be able to keep the real estate, while taking only the Required Minimum Distributions (RMDs) from the inherited IRA. It might make sense if Julia owns the insurance policy or it’s owned by a trust as well.  See here for more details on how that might work for you.  https://www.galliganmanning.com/trust-owned-life-insurance-in-your-estate-plan/

However, there are a few common life insurance errors that can damage an estate plan:

Designating the estate as beneficiary. If you make this move, you put the policy proceeds in your estate, where the money will be exposed to estate tax and your creditors. Your executor will also have additional paperwork, if your estate is the beneficiary. Instead, be certain to name the appropriate beneficiaries.

Designating a single beneficiary. Name at least two “backup” or contingency beneficiaries. This will eliminate some confusion in the event the primary beneficiary should predecease you.

Designating your revocable trust.  If estate taxes aren’t a concern and you use a trust-based estate plan, sometimes designating your trust as a beneficiary is a great idea as it provides liquidity to your family for estate expenses.

Placing your life insurance in the “file and forget” file. Be sure to review your policies at least once every three years. If the beneficiary is an ex-spouse or someone who has passed away, you need to make the appropriate change and get a confirmation, in writing, from your life insurance company.

Inadequate insurance. You may not have enough life insurance. If you have a young child, it may require hundreds of thousands of dollars to pay all of his or her expenses, such as college tuition and expenses, in the event of your untimely death. Skimping on insurance may hurt your surviving family. You also don’t need to be so thrifty, because today’s term insurance costs are very low.

As you can see, life insurance may be a powerful estate tool.  Speak with your advisor and your estate planning attorney on how best to incorporate life insurance in your estate plan.

Reference: FedWeek (June 11, 2020) “Protect Your Estate With Life Insurance”

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