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tax complications and challenges facing America

Estate Planning For Families That Include a Non-U.S.-Citizen Spouse
Americans living abroad may accumulate more than income and assets while living and working abroad, they may also find love! Unfortunately, the tax complications and challenges facing American expats also extend to the circumstance of marrying a foreigner. Even if an expat’s spouse obtains U.S. permanent resident (“green card”) status, gifts and bequests to the non-citizen spouse are not eligible for the unlimited marital deduction. On the other hand, the $11.2 million (2018) lifetime exclusion applies to bequests left to anyone, including a non-citizen spouse. For estates larger than the lifetime exclusion limit, alternative estate planning strategies may be required, two of which are discussed below.

Lifetime gifting to the non-citizen spouse: First, although a citizen can give unlimited assets to a fellow citizen spouse during her lifetime, there is a special limit allowed for tax-free gifts to non-citizen spouses of $152,000 annually (2018). Accordingly, a gifting strategy can be implemented to shift non-U.S. situs assets from the citizen spouse to the non-citizen spouse over time, thereby shrinking the taxable estate of the citizen spouse. The nature, timing, and documentation of the gifts should be done with the assistance of a knowledgeable tax and/or legal professional.

Qualified domestic trust (QDOT) – an important tool for marriages between a U.S. citizen and a non-citizen spouse: A QDOT is a type of trust designed to afford the surviving spouse the ability to claim use of and income from the decedent spouse’s estate during the lifetime of the surviving spouse, but then the QDOT assets will pass to the original decedent’s heirs upon the death of the surviving spouse. With a QDOT, only distributions from principal during the surviving spouse’s life and at the surviving spouse’s death are subject to estate tax (insofar as they exceed the original decedent spouse’s exclusion). Accordingly, the QDOT can be a critical wealth planning tool for deferring the estate tax until distribution to eventual U.S. citizen heirs when the surviving spouse is a non-U.S. citizen.

The QDOT can be created by the will of the decedent or the QDOT can be elected within 27 months after the decedent’s death by either the surviving spouse or the executor of the decedent’s estate. If the QDOT is created after decedent’s death, the surviving spouse is treated as the grantor for income and transfer tax purposes. Certain transfer tax treaties provide spousal relief that may lessen the need for a QDOT, and, if the treaty benefit is claimed, the QDOT may no longer be utilized.

It should also be noted that, while the QDOT trust can certainly be a useful tool for arranging for the eventual transition of the U.S. estate to U.S. citizen heirs while providing maintenance for the surviving non-citizen spouse, the tax and maintenance consequences may pose considerable negatives that outweigh the benefits of setting up the trust arrangement. The crossborder family may have alternative solutions for providing for the heirs and for the maintenance of the noncitizen spouse that are more practical or even more tax efficient (such as a lifetime gifting strategy, discussed above). The personal and financial merits of the QDOT and alternative planning tools must be analyzed on a case-by-case basis.