Estate planning is a must for non-U.S. citizens in the United States as they may face some major estate planning challenges when it comes to taxes. Estate planning for non-US citizens is much more complicated as compared to estate planning for American citizens. Either you are hitched with a non-US citizen or if you are an alien resident who is hitched with a US citizen, you are required to follow some distinctive rules for estate planning.
The basic estate planning steps are the same for the non-citizens as for the U.S. citizens i.e. you should have a will or living trust, beneficiaries should be named on insurance, bank & retirement accounts, and financial & medical power of attorney must be placed to manage the medical and financial affairs if you are incapacitated.
Estate Planning for Non-US Citizens-
If you are a resident but not a citizen of the US, you will be regarded similar to a U.S. citizen but with some exclusion. While if you are a non-resident alien, your estate taxation will be considerably different. If you are a non-citizen who is residing in the U.S., then your assets across the globe will be subjected to estate and gift taxes with $11.58 million exclusion and an exception to $15,000 on annual gift tax for the year 2020. Additionally, it will get doubled if you are married and split it with your partner who is a U.S. citizen.
According to IRS, anyone who is the domicile of the U.S. at the time of death will be considered as resident of the U.S. and will be subjected to federal estate tax. One receives a domicile of a place by staying at that place, even for a short duration, with the intent staying there permanently.
If you are neither a U.S. citizen nor a resident, there is an advantage as well as a disadvantage. The advantage is that you are subjected to the U.S. gift and federal tax only on the property which is situated in the U.S. only along with an annual exception to $15,000 as you can’t split gifts with your partner. The disadvantage is that the estate tax exemption for you is lowered to $60,000 as compared to $11.58 million which means that if you own a significant value of assets in the U.S. you will be paying a huge amount of tax bill. Such assets include U.S. real estate and belongings like a vehicle, artwork, etc. which are located in the U.S.
If you have a significant amount of property then only the estate tax is imposed, so if you don’t have that much of estate value with you then there are no worries. However, if you have a significant amount of property then below mentioned are two main methods that you can consider:
1. Get citizenship: If the non-U.S. citizen partner of yours applies for the U.S. citizenship and gets it within the time duration of your estate tax return is due then he/she qualifies for the unlimited marital deduction. It means that the estate will not be further subjected to federal estate taxes. Getting citizenship is a time taking process and people face long waiting periods before and after applying for citizenship and hence, most people don’t opt for this option.
2. Use QDOT trust: By using a special trust, known as “qualified domestic trust” or QDOT, the non-citizen partner can heir your assets without paying hefty taxes. You need to leave your assets in the QDOT trust with naming your partner as the beneficiary. Notably, there shouldn’t be any other beneficiary until he/she is alive. He/she will get income generated by the trust and it will not be subjected to estate tax.
A QDOT trust is set up during the lifetime of both the partners, while it comes into existence after the demise of either of the partner with the assets being transferred to the trust within the due time period of the estate tax return. However, it must be ensured that the trustee can only be a U.S. citizen or corporation like a bank, etc.
Understanding the federal estate tax law is quite difficult and it becomes more difficult when one or both of you are non-citizens. We advise you to contact estate planning lawyers to get more details and set up a proper estate planning.
