FAQ on Estate Planning for Non-Citizens

October 12, 2015

estate planning

Estate planning is complicated enough for an average U.S. Citizen, but when you add non-citizen relatives to the mix, it can get outright confusing. Maybe you are married to a non-citizen and want him or her to inherit your assets with minimal complications. Or maybe you’re a permanent resident or a non-resident who wants to make sure your U.S. Citizen relatives can take possession of your U.S. assets as you planned. Either way, our Maryland estate planning attorney is here to help you clear up any confusion and misunderstanding.

Can I leave money or assets to a non-citizen?

First of all, yes, you absolutely can. The U.S. law doesn’t restrict you in this regard. However, the U.S. Government doesn’t want your foreign spouse to take the inheritance and leave the country. That’s why they have imposed taxes on gifts and estate that exceed a certain amount.

Should I still get a Will?

You definitely should. Although your situation as a non-citizen may be more complicated, it doesn’t mean you can’t take advantage of the basic estate planning documents, such as a Will or a Power of Attorney. In some cases, that’s all you need, but it doesn’t hurt to check with your attorney to make sure you have all your bases covered.

Do non-citizens qualify for the unlimited marital deduction?

When researching estate planning, you may have stumbled upon the term “unlimited marital deduction.” It means that one spouse can transfer or gift unlimited assets to another spouse tax-free, as long as the receiving spouse is a U.S. Citizen. These assets then become a part of the other spouse’s estate. Unfortunately, this deduction doesn’t apply to non-citizen spouses, so the assets will be taxed if they exceed the federal estate tax exemption.

Is the estate tax exemption amount different for non-citizen spouses?

No, the exemption amount is the same no matter who your spouse is. Assets under $5 million (+ annual inflation adjustment) are not subject to the federal estate tax when transferred directly to your spouse. The excess, however, can be taxed at a 40% rate. Also keep in mind that Maryland has a state estate tax with a lower threshold—$2 million in 2016. Although the rate is only 16%, it may lead to significant losses when a large estate is at stake.

What about gift tax limits?

Because U.S. Citizen spouses enjoy the privilege of the unlimited marital deduction, they don’t need to worry about paying taxes on gifts they give each other. However, gifts given to a non-citizen spouse are subject to $147,000 (+annual inflation adjustment) annual limit before they get taxed.

What is a Qualified Domestic Trust?

A Qualified Domestic Trust (QDOT) is a type of Trust designed to help non-citizen spouses defer paying taxes on the taxable portion of their inheritance. This Trust is often used by couples whose combined taxable assets exceed the $5 million threshold. It allows putting off the tax responsibility until the receiving spouse’s death, so that he or she has more funds to support themselves during their lifetime. But keep in mind that QDOT has strict qualification requirements. Talk to your Maryland estate planning attorney if you think you may need a QDOT.

What if I become a citizen after my spouse’s death?

After your U.S. Citizen spouse dies, you typically have a 9-month window until your federal estate taxes are due. If during that time you become a citizen, you can take full advantage of the unlimited marital deduction.

What if my non-citizen relative from abroad wants to leave me assets?

Generally, the estate of a person who is not a U.S. Citizen will be subject to the laws of their country of citizenship. However, if your relative owns U.S.-based assets, such as real estate or securities, they may be subject to the federal estate tax before you can claim them. The exempt amount for such assets is $60,000, which means the excess may be taxed. Consult with your attorney to check whether your relative from abroad needs to take any special actions to avoid paying unnecessary taxes.

Do you have other questions about estate planning for non-citizens of the United States? Give DK Rus Law a call or contact us online for a free consultation.

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