Planning for Non-U.S. Citizen Clients
No matter where a U.S. citizen or resident
(domiciliary) lives or who his beneficiaries are, both
federal estate and gift tax (and presumably generation-skipping
transfer tax) rules apply. The U.S. taxes the assets
of its citizens and residents no matter where in the
world those assets are located.
Many of us are married to or have family
members who either live inside or outside the U.S. but
who are not U.S. citizens.
This commentary is to alert you to some
of the special problems and unique planning opportunities
which are present when a family member is not a U.S.
citizen or resident. (Of course, if this discussion
doesn't apply to you, feel free to share it with a friend
who may find it useful.)
First, if you are married to or have family
members who either live outside the U.S. or inside our
country but who are not U.S. citizens, its very important
to let the members of your planning team know this fact.
Don't assume that they do!
Second, if you or a family member are
either not a U.S. citizen or live in a foreign country,
your planning team needs to know if you or a family
member living here owns property outside the U.S.
Here are some facts you should know if
one spouse is not a U.S. citizen:
No marital deduction will be allowed -
for estate tax purposes - for transfers made directly
to or in trust for a surviving-spouse where the surviving
spouse is not a U.S. citizen. Absent a marital deduction,
assuming a significant estate, there may be an immediate
and large tax that can't be deferred until the death
of the surviving spouse. The impact of this tax is potentially
There is a tool called a QDOT (Qualified
Domestic Trust) which enables a deferral of the federal
estate tax on property that passes to the QDOT for the
non-citizen spouse at the U.S. citizen's death. Unfortunately,
this QDOT merely serves to delay the imposition of the
tax. It is NOT equivalent to a regular marital deduction
in any sense - except for the fact that there is no
immediate tax at the death of the first spouse to die
and that income paid from the trust is not subject to
federal estate tax.
There is a provision in the tax law that
creates what some authorities call a "super annual exclusion."
Using this provision, gifts to a non-citizen spouse
that otherwise qualify for the annual gift tax exclusion
can be made in amounts of up to $110,000 (2002) (adjusted
for inflation) a year - every year.
You may want to consider a popular technique
for leveraging the "super annual exclusion:" The citizen
spouse makes gifts to the non-citizen spouse each year
- up to the $110,000 tax exempt gift limit.
The non-citizen spouse then leverages
this "super-annual exclusion" gift by purchasing life
insurance on her/his citizen spouse's life with all
or a significant portion of it. The death benefit generated
by the coverage would provide significant financial
security that would be free from the citizen spouse's
creditors, estate and income tax, as well as probate
free. Policy proceeds could be used to purchase assets
from the estate of the U.S. citizen spouse and obtain
a new and "stepped-up" basis (cost) for those assets.
There is, of course, much more to know
where one or more family members is not a U.S. citizen
or someone owns property outside the U.S.
As always, there's a lot more to this
than one page of paper will hold. Please feel free to
call to chat about this or any other financial security
topics of interest to you or your business.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
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