Last Updated on June 24, 2020 by Tresi Weeks
According to the Pew Research Center, in 2017, there were 44.4 million foreign-born people living in the United States, 55% of whom were non-citizens. As a result, there are many occasions when a non-citizen may be the beneficiary of the estate of a U.S. citizen, for example, if the non-citizen immigrant married a U.S. citizen. There are no laws prohibiting this, though non-citizen spouses—regardless of whether they are in the U.S. legally or illegally—may be treated differently for estate and gift tax purposes.
No unlimited marital deduction. For estate tax purposes, in general, married people are presumed to share assets (i.e., money and property). As a result, generally, when the first spouse dies, all assets are transferred to the surviving spouse, and no estate tax is due as a result of the transfer. This is because there is an unlimited marital deduction available to married couples when both spouses are U.S. citizens, which delays the payment of any estate tax until the death of the second spouse. However, if a U.S. citizen spouse dies before his or her non-citizen spouse, the unlimited marital deduction is not available. If there is any estate tax due, it must be paid immediately. This is to prevent the non-U.S. citizen spouse from taking their inheritance and leaving the country before having paid taxes due.
This dilemma can be addressed if the spouse who is a U.S. citizen sets up a qualified domestic trust (QDOT), which gives the non-citizen spouse the benefit of the unlimited marital deduction, but ensures taxes due will later be paid after the non-citizen spouse passes away. The non-citizen spouse must be the only beneficiary of the trust for his or her life, and the trustee must be a U.S. citizen or U.S. corporation. The non-citizen spouse, as the trust’s beneficiary, can receive the income that the trust property generates without having to immediately pay the estate tax. The estate tax on funds or property transferred to the QDOT will be deferred. If a distribution is made because the non-citizen spouse has an immediate need and has no other resources available, the principal may also be distributed to him or her without incurring estate tax liability. If the non-citizen spouse eventually becomes a U.S. citizen, the principal can be distributed to that spouse without any further tax.
Jointly owned property treated differently. If a married couple jointly owns a home, it is 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 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.
No unlimited gifting. Generally, spouses can make unlimited gifts to each other without having to pay the federal gift tax. However, if a spouse who is a U.S. citizen makes a gift to a non-citizen spouse, there will be a gift tax if the gift is valued over $155,000 (for 2019). Similarly, if the married couple buys property together, and the U.S. citizen spouse pays the entire purchase price, 50% of the value of the property will be considered a gift to the non-citizen spouse.
Regardless of the immigration status of your family members or loved ones, it is crucial to create a well-thought-out estate plan to provide for them in the way you intend and to minimize your estate and gift tax liability.