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If Your Husband or Wife is an Expat, What Kind of Estate Planning Rules Apply?

When your spouse is not a citizen of this country, and you wish to leave them considerable assets upon your death, what are the estate tax rules that apply? This article looks at the subject.

If your husband or wife isn’t a U.S. national, most of your estate planning is unaffected by their citizenship status A few specific laws do apply, however.

Elementary estate planning

As far as the initial moves that you must make go, it is immaterial whether one of you isn’t a U.S. national. The following steps are important for either spouse to take:

  • Write a will to declare whom your assets in the United States go to.
  • Decide on who will receive the assets in your retirement savings.
  • Set up powers of attorney for your financial assets, and your medical needs.

Can a person inherit property when they aren’t a U.S. national?

If you wish to give your assets away to your husband or wife who is an expat, the law has nothing against it. A spouse who is a foreign citizen can inherit wealth in a will just the way U.S. nationals do. When you write your will or register a nominee for your life insurance, naming an expat husband or wife offers no complications.

How estate and gift taxes work

The federal estate and gift tax is only of concern to people who are very rich. For instance, an individual only needs to be concerned with these taxes when they plan to leave more than about $12 million. Anything below this level would attract no taxes. The tax comes into play with transfers of property — both while living and at death. Everything donated or left to others is added up to see if it passes the high threshold set.

Bequeathing assets to others at death

Your husband or wife who receives assets from you upon your passing, pays no federal estate taxes. Only surviving spouses who are U.S. nationals are eligible for the exemption, however. The unlimited marital deduction, as this clause is named, is granted over and above the individual exemption that every person gets.

Surviving expat spouses do not get the marital deduction. Permanent U.S. residents do not benefit from it, either. The government does not approve of a scenario in which an expat husband or wife inherits assets, and goes back to their home country contributing no taxes.

Nevertheless, it’s important to remember that the threshold of approximately $12 million applies to anyone, whether they are U.S. nationals or not. In addition, if an expat husband or wife passes away and leaves their spouse who is a U.S. national a considerable inheritance, the living husband or wife is able to take advantage of the unlimited marital deduction.

Gifts that pass hands before death

Gifts that you give your U.S. national husband or wife in your lifetime attract no federal gift tax. If they aren’t a national, though, they remain tax-free only to about $160,000 per annum (according to the rules in effect in the year 2021).

Putting off taxes or saving on them

If you’re wealthy enough to be concerned about the level of tax that you will owe, you may adopt one of two strategies.

Your husband or wife may gain U.S. nationality: If your husband or wife becomes a U.S. national by the time the tax comes due, they get to take advantage of the unlimited marital deduction. They have nine months after your passing, to gain U.S. nationality. Since citizenship applications move slowly, however, this strategy doesn’t work for most.

Choose a qualified domestic trust: If your husband or wife is a foreigner, you can still leave them an inheritance without being encumbered by taxes. You can do this by using a qualified domestic trust (governed by IRS section 2056A). Rather than leaving your assets to your husband or wife, you place them in a trust to which they are the sole beneficiary. Whatever income the trust produces, it attracts no estate tax.

Your husband or wife may even be able to access the assets in the trust directly tax-free if they can demonstrate that they need them for an emergency, and have no other resources. In all other circumstances, however, accessing these assets directly can mean that your husband or wife ends up paying tax.

It’s important to establish a qualified domestic trust and transfer assets into it before estate tax for the deceased husband or wife falls due. In most cases, such a trust is set up while both spouses are still around, and is designed to go into effect when the spouse who is a U.S. national, passes away.

If you are concerned about taxes for an expat husband or wife, it would make sense to speak to an estate planning lawyer. The rules that govern these moves tend to be complicated, and require considerable knowledge of the processes involved.