Individuals who own property in the United States but who are not U.S. citizens, such as nonresident aliens and green card holders, need effective estate planning strategies to counteract this set of challenges. The primary challenge is that noncitizens are not qualified to exert the exemption for federal estate and gift taxes that citizenship provides. That amount fluctuates according to constant changes in law, but the current exemption amount in 2022 that citizens enjoy is $12.06 million per person, an increase from $11.7 last year. In contrast, non-citizens are entitled to an exemption amount of only $60,000 for estate tax purposes for their U.S. property.
For married couples, generally there is an unlimited marital deduction, meaning that spouses can pass an unlimited amount of assets between each other without incurring any estate tax liability. If the spouse receiving property is not a U.S. citizen or a U.S. resident, the assets must pass in the form of a Qualified Domestic Trust (QDOT).
A QDOT allows a noncitizen surviving spouse of a deceased citizen taxpayer to take advantage of the unlimited marital deduction on estate taxes for any assets that are transferred via a QDOT. To be a qualifying QDOT, the following provisions must be met:
- The trust states that its governing law is that of a U.S. state or the District of Columbia.
- The trustee must be a U.S. Citizen or a U.S. corporation.
- If the property transferred to the QDOT has a value exceeding $2 million, the trustee must be a U.S. bank and the trustee must post a bond with the IRS equal to 65% of the fair market value of the property.
Note this is a tax deferral strategy not a tax avoidance strategy. The federal estate tax on the value of the assets funding the QDOT is deferred until the noncitizen surviving spouse takes money out of the QDOT or passes away. If the surviving spouse becomes a U.S. citizen, he or she can then take all the assets in the QDOT, and the deferred tax liability ceases to exist.
For individuals or couples who are not U.S. citizens but own U.S. property, it is essential to create a comprehensive estate plan with a knowledgeable estate planning attorney. Regardless of age, amount of wealth, or citizenship status, everyone must create an estate plan in order to protect against probate at death, incapacity, or simply to choose legal guardians for their minor children. Many factors come into play in estate planning for noncitizens that do not necessarily apply to citizens. Reach out to the estate planning attorneys at Stouffer Legal in the Greater Baltimore area for more information on estate planning for non-U.S. citizens. You can schedule an appointment by calling us at (443) 470-3599 or emailing us at office@stoufferlegal.com.
