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. In 2019 alone, approximately 1,031,000 foreign nationals obtained lawful permanent resident status.[1] It is not only permissible, but essential for those individuals, like U.S. citizens, to have estate plans in place. There are a number of special issues non-citizens may need to consider.
Property Located in Another Country
It is possible that a non-U.S. citizen may own property located in another country. This should be considered in designing his or her estate plan.
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 generally recognize the concept of trusts, but civil law countries generally 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 typically 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, as well as many others, 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.
Another option is an international will. The United States and a limited number of other countries enacted the Uniform International Will Act pursuant to the International Institute for the Unification of Private Law (UNIDROIT) convention. The Uniform International Will Act establishes criteria that must be met for a legally effective international will. However, many countries have not signed on to the convention and thus do not recognize international wills.
As mentioned above, civil law countries typically do not recognize trusts. As a result, trust-based estate planning may not work in some foreign countries where real property or children who are beneficiaries are located. Further, civil law countries may treat a trust as an unrelated party and impose the highest inheritance tax rate. In addition, some common law countries impose taxes on transfers to trusts or impose periodic taxes upon trust property.
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.
A permanent resident should also keep in mind that he or she may be required to pay an exit tax (i.e., a capital gains tax on the appreciation of any property they own) upon giving up permanent resident status.
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.[2]
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.
To mitigate the potential estate tax consequences in such a scenario, some families might consider implementing a special trust called a qualified domestic trust (QDOT). A non-citizen spouse can inherit from a U.S. citizen spouse free of estate tax if the U.S. citizen creates a QDOT. The U.S. citizen can leave property to the trust, instead of directly to the non-citizen spouse. The spouse is the beneficiary of the trust, and the trust cannot have any other beneficiaries while the non-citizen spouse is alive. The non-citizen spouse, as the beneficiary of the trust, can receive the income that the trust property generates without having to pay the estate tax. The estate tax on funds or property transferred to the QDOT will be deferred until the principal is distributed. However, if a distribution is made because the non-citizen spouse has an urgent, immediate need and has no other resources available, the principal may also be distributed to him or her without incurring estate tax liability. Further, if the non-citizen spouse eventually becomes a U.S. citizen, the principal can be distributed to that spouse without any further tax. A QDOT must be established, and the property must be transferred to it, by the time the estate tax return of the deceased spouse is due. Usually, it is set up while both spouses are alive and comes into existence when the citizen spouse dies. The trustee—that is, the person or entity in charge of managing the trust assets—must be a U.S. citizen or a U.S. corporation such as a bank or trust company.
Jointly owned property treated differently. If a married couple jointly owns a home, it is generally assumed to belong to both spouses equally when both are U.S. citizens. This means that each of the spouses is considered to own a 50% share of the home. However, if one of the spouses is not a citizen, this presumption does not necessarily apply. For example, if the spouse who is a U.S. citizen dies first, and the jointly-owned home is worth $200,000, the entire $200,000—instead of $100,000—will be included in that spouse’s taxable estate unless the non-citizen spouse proves he or she contributed a certain amount toward the purchase of the home. Thus, if the non-citizen spouse made $50,000 in mortgage payments, the amount included in the U.S. citizen spouse’s estate would only be $150,000. If the married couple buys property together, and the spouse who is a U.S. citizen pays the entire purchase price, 50% of the value of the property will be considered a gift to the non-citizen spouse.
Hellmuth & Johnson Can Help
Estate planning for non-citizens is very complex. If you are a non-citizen or are married to a non-citizen, we can help you think through all of the issues that may affect how you plan for the future. Call us today so we can help ensure that all of your documents are valid and enforceable, that proper planning is in place for property located in other countries, and that your estate and gift tax liability is minimized.
[1] Department of Homeland Security, “Legal Immigration and Adjustment of Status Report Fiscal Year 2019, Quarter 4,” accessed March 16, 2020, https://www.dhs.gov/immigration-statistics/special-reports/legal-immigration
[2] Australia, Austria, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, Norway, South Africa, Sweden, Switzerland, and the United Kingdom.
