If your spouse isn’t a U.S. citizen, you may face special estate and financial planning issues. These issues include how you should give assets to your noncitizen spouse while you are alive and how you should leave assets to your noncitizen spouse following your death. Failure to understand these issues could result in significant tax liability or other financial consequences.
Federal gift tax laws apply to lifetime property transfers of all U.S. citizens and residents; under the current law, if your spouse is a U.S. citizen, any gifts you give to him or her during your life are free of federal gift tax, regardless of the amount, which is commonly referred to as the “unlimited marital deduction.” If your spouse is not a citizen, however, your annual gift is limited to $145,000 for 2014. Any gifts to your noncitizen spouse that are larger than the annual amount will be considered taxable gifts.
All assets left upon death to a U.S. citizen spouse qualify for the unlimited marital deduction. However, noncitizen spouses cannot receive the benefit of the unlimited marital deduction for assets left to them at death. However, at death, the noncitizen spouse can receive up to $5.34 million in 2014 – the gift and estate tax threshold – less the amount of any previous taxable gifts, without having to pay federal estate taxes.
If your estate is worth more than $5.34 million, it may be subject to federal estate tax if it transfers directly your noncitizen spouse. As a result, you may want to consider having any amount in excess of that threshold pass to the surviving noncitizen spouse in a qualified domestic trust (QDOT). A QDOT is a marital trust that is designed to defer estate taxes during the noncitizen spouse’s lifetime. By using this tool, federal estate taxes will only be imposed after the death of the surviving noncitizen spouse.
There are many requirements necessary for this type of trust to qualify for this special tax treatment, including restrictions on who may serve as trustee. Usually at least one U.S. citizen or a domestic corporate trustee must be in place. In addition, a bond must typically be posted to guarantee payment of the deferred tax.
If your estate is worth more than the federal exemption amount and your will or revocable trust doesn’t provide for a QDOT, you have another option. In such cases, your noncitizen spouse can transfer the inherited excess amount to a QDOT prior to the filing of your estate tax return. The trust must be created no later than one year after the estate tax return’s due date.
If your estate is worth more than the federal exemption amount and there are significant retirement plan assets passing directly to your noncitizen spouse at your death, you should review additional planning issues with a qualified estate planning attorney. The options available for your noncitizen spouse in qualifying these assets for the marital deduction following your death are limited and can be complicated.
If you jointly hold property with your noncitizen spouse upon your death, the amount that will be included in your gross estate for federal estate tax purposes is determined by the “contribution rule.”
There are also gift tax consequences if your joint tenancy ends during your lifetime. The jointly-held property can be considered a taxable gift between spouses upon both the creation and termination of your joint tenancy, depending on certain factors. These factors include:
When you’re a U.S. citizen and your spouse is not, it’s particularly important to have a strategy to preserve your assets both during and after your lifetime, especially if your estate will be subject to estate tax. Consult a qualified estate planning attorney to determine the best tools and estate planning actions for your particular situation.
Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor.
Examples included herein, if any, are hypothetical and for illustrative purposes only. Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, are not deposits, are not insured by any federal government agency, are not a condition to any banking service or activity, and may lose value.
This material is for informational purposes only and the statements made represent TIAA-CREF's interpretation of applicable law. It is presented with the understanding that TIAA-CREF (or its affiliates, distributors, employees, representatives and/or insurance agents) is not engaged in rendering legal or tax advice.
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