Last month I wrote my column on the basics of International Estate Planning. I explained the definitions of US Citizen, Non-resident Alien, and Resident Alien. The definition of a Resident Alien is different for Income Tax purposes than it is for Gift and Estate Tax purposes, even though both taxes go to the same IRS.
Today I want to go into greater detail about some of the Gift & Estate Tax problems faced by a US Citizen with a non-US Citizen (alien) spouse. I mentioned in last month’s column that there are major potential problems with transferring assets between a US Citizen spouse and a non-US Citizen spouse, whether during your life or at your death. I stated that you can only give $154,000 per year to an alien spouse, even if he or she is a resident or has a green card, which is almost true except for the typo. The Gift Tax annual exclusion for gifts to a non-US Citizen spouse in 2019 is actually $155,000, not $145,000.
So what problems can arise with a non-US citizen spouse?
Gifts to Alien Spouse
If you make any large gifts to your alien spouse, such as adding his or her name to your bank account or the deed on your home where half the net value of your home is worth more than $154,000, you have made a taxable gift requiring that you file a gift tax return and possibly pay a gift tax! Interestingly, the IRS position is that every time a transfer is made, it constitutes a new gift, even if it’s the same property going back and forth. So if you have added your spouse to the title of your home, as in the above example, then later you take your spouse’s name off the deed (maybe to refinance a mortgage only in your name), and then put your spouse back on title to the property afterward, that second transfer constitutes another gift, for which you might owe gift tax again…on the same exact property being transferred between you! If you were to do this enough times, you could use up your entire lifetime exemption from Gift and Estate tax, and end up losing the entire value of the property in gift tax just by transferring it back and forth between spouses, where at least one spouse is not a US Citizen! This applies whether your alien spouse is a resident or not.
Estate to Alien Spouse
When you pass away and leave assets to your spouse at your death, there is an unlimited marital deduction if your spouse is a US Citizen. This means that you could be very wealthy and leave more than the $11.4 million exemption amount to your US Citizen spouse, and neither you nor your spouse would have to pay any estate tax on the entire amount, even if it’s billions of dollars! Unfortunately, if your spouse is not a US citizen, there is no marital deduction for your estate—even if your spouse is a Resident Alien.
Thankfully, there is a solution to this problem. If your spouse is not a US Citizen, you can create what’s called a “Qualified Domestic Trust” (also called a “QDOT”) and leave your assets in the trust for the benefit of your alien spouse. This will enable your estate to qualify for the marital deduction regarding all assets going into the QDOT. The purpose of the QDOT law is to allow the alien spouse to qualify for the marital deduction, while making sure that he or she does not leave the country with those inherited assets and escape paying estate tax on those assets.
The basic requirements of a QDOT are: (1) The Trustee must be a US Citizen; (2) if the QDOT assets are greater than $2 million, then one of the trustees must be a US Bank; (3) all of the QDOT income should be distributable to the surviving Non-US Citizen spouse; and (4) any trust principal distributed from the QDOT is subject to estate tax as if it were in the deceased spouse’s estate.
In this column I primarily addressed problems with giving assets to an alien spouse. In a future column I’ll address the problems of a Non-resident Alien transferring US situs assets. There are some strange differences between Gift Tax rules and Estate Tax rules depending on what kind of assets are being transferred. I’ll also discuss some solutions as to the best ways a Non-resident Alien can hold and transfer US assets while legally avoiding Gift and/or Estate tax.
© OKURA & ASSOCIATES, 2019