According to the 2013 U.S. Census Bureau Report, “11.4 million married couple households, or 21 percent of all married-couple households in America in 2011, had at least one spouse born in another country. About 13 percent (7.3 million) of households had two foreign –born spouses, and 7 percent (4.1 million) had one native-born and one native-born and one-foreign born spouse.” Census News Release, CB13-157, Sept. 5, 2013, Census Bureau Reports 21 Percent of Married-Couple Households Have at Least One Foreign-Born Spouse.
Foreign born spouses who are not U.S. citizens spouses face unique estate and tax planning issues. If you are a U.S. citizen, the United States Federal Estate and Gift Tax Law provides an unlimited marital deduction that allows you to transfer an unrestricted amount of assets to your spouse free from tax at any time, including at your death. By postponing the transfer of taxes on property inherited from each other until the second spouse’s death, there may be some advantages for the surviving spouse, including:
- The surviving spouse can spend or gift assets transferred under the unlimited marital deduction during his/her lifetime. In some situations, less taxes may be paid by the surviving spouse upon death through estate planning.
- If the surviving spouse remarries, the unlimited marital deduction may allow the assets to pass to the new spouse without the application of estate and/or gift taxes.
However, if the spouse who is not a U.S. citizen dies, then the unlimited marital deduction does not apply. The tax consequences upon death for a non-citizen spouse are different for citizen spouses. Non-citizen spouses may face the burden of becoming eligible for the unlimited marital deduction which is not the case for married couples who are citizens.
When it comes to postponing taxes for married couples after the death of one spouse, our tax law does not treat couples equally. Married couples who are U.S. citizens will get this benefit yet, a married couple with a non-USC needs to qualify. Here are some options:
- The U.S. currently has treaties with other countries to provide a marital deduction or a credit in lieu of the deduction. See: https://www.irs.gov/businesses/small-businesses-self-employed/estate-gift-tax-treaties-international. This is often the first place to look to see if a non-citizen spouse can benefit from the unlimited marital deduction.
- Alternatively, couples with a non-citizen spouse can qualify if the surviving spouse can become a naturalized citizen before the estate tax return is due, both the deceased and surviving spouse will be citizens and the unlimited estate tax marital deduction should apply. This option requires advance planning. It may take a year or more to complete the naturalization process under the current administration. Furthermore, there is a separate set of requirements to become a naturalized U.S. citizen. The last step in the naturalization process is the taking of the Oath, which is required to become a U.S. citizen.
- The Qualified Domestic Trust (QDOT) provides another option for non-citizen spouses. QDOT allows the non-citizen surviving spouse to receive the deceased citizen spouse’s property for his or her benefit. Under a QDOT, the federal tax estate liability is deferred until distributions of principal are made to the non-citizen surviving spouse. Upon the death of the non-citizen surviving spouse, remaining assets of the surviving non-citizen spouse are subject to taxation. These distributions are subject to estate tax.
Non-citizen marital couples should be aware of how the unlimited marital deduction may affect them. Our office also helps non-citizen spouses become eligible through naturalization and citizenship processes.