Estate Planning Issues for Non-U.S. Citizens Domiciled in the U.S.

The United States has long been considered a melting pot of cultures.  Many companies hire international workers who bring specific skills to their industries.  Those international workers may elect to reside for long period of time in the United States, and they ultimately may stay and raise a family.  However, retention of property outside the U.S. or marrying a non-citizen creates complexity in an estate plan.

As a general rule, U.S. citizens (no matter where they reside) and non-U.S. citizens domiciled in the United States are subject to U.S. gift and estate taxes with respect to all of their assets or interests in assets whether located or situated within or outside of the U.S.  By contrast, non-U.S. citizens domiciled outside the U.S. are subject to gift and estate taxes only on assets or interests in assets located or situated in the U.S.  Whether or not an individual is required to pay estate or gift taxes depends on the value of the transfer at the time of the gift or death of the individual and may be affected by any tax treaty in place with the non-citizen’s country of residence.

If a U.S. citizen is married to a non-citizen spouse at his or her death, special arrangements may need to be made to reduce the potential estate taxes payable at death.  These special arrangements would require the establishment of a qualified domestic trust (“QDOT”).  Assets passing to a QDOT are held for the exclusive benefit of the surviving non-citizen spouse and will not be subject to estate taxes until the earlier of (i) the distribution of the assets from the QDOT or (ii) the death of the surviving non-citizen spouse.  When assets are distributed (either during the surviving spouse’s lifetime or upon the surviving spouse’s death), the assets are taxed at the estate tax rate that would have been imposed on the predeceased spouse’s estate if the QDOT had not been created.

A valid QDOT must meet the following requirements:

  • At least one trustee must be a U.S. citizen or domestic corporation (the “U.S. Trustee”);
  • The U.S. Trustee must have the right to withhold certain taxes due from the distribution;
  • A QDOT election must be made by the deceased spouse’s executor on the deceased spouse’s estate tax return; and
  • The Trust must otherwise qualify for the estate tax marital deduction.

A QDOT may be funded by a surviving spouse that receives property directly from a deceased spouse (e.g., joint tenancy property, retirement plans, life insurance proceeds) if the surviving spouse transfers the property to a valid QDOT.  In order for the transfer to qualify as a transfer to a QDOT, the transfer must be made before filing the decedent’s estate tax return is filed.

In addition to estate and gift tax issues discussed above, certain property owned by a non-citizen resident at his or her death may be subject to probate.  Probate is the process whereby the applicable Probate Court determines the ownership of the decedent’s assets, after his or her death, in light of any Will he or she may have created during lifetime.  If the decedent did not create a Will, the state’s intestacy law will determine who is entitled to receive his or her assets. 

If you own property outside the U.S., you should consult with an estate planning attorney who is knowledgeable about these complex issues.  If your spouse is not a citizen of the U.S., you may need to consider utilizing a QDOT to minimize any estate taxes that would be due upon your death.  Please contact Schormann Law Firm if you would like to review the estate and gift tax issues applicable to you (and your spouse, if appropriate), as well as obtain assistance with basic estate planning issues such as ownership of assets, powers of attorney, living wills, guardians for minor children, trusts and wills.  Periodically reviewing ownership of your assets in conjunction with your estate plan can help assure that your assets are distributed among your various beneficiaries according to your wishes and minimize administrative costs and taxes.

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