Estate Tax Trap For Non-U.S. Citizens

In 1988 Congress took steps to close what was perceived to be a loophole in the existing estate tax laws as they applied to non U.S. citizens married to U.S. citizens. Prior to 1988, the federal estate tax laws allowed an unlimited marital deduction , and accordingly the deferral of all estate taxes, when a spouse passed away leaving property to the surviving spouse. This unlimited marital transfer rule applied to all taxpayers, whether they were U.S. citizens or not. What Congress sought to eliminate was the tax avoidance which resulted when the surviving spouse was not a U.S. citizen, who, after inheriting the assets, would return to his/her country. Since the property would no longer be in the United States, upon the subsequent death of the sur viving non U.S. citizen spouse the marital property which received the estate tax deferral would not be able to be taxed in the U.S.

Congress' solution was to eliminate in its entirety the marital deduction allowance when property passes from a U.S. citizen spouse to a resident alien surviving spouse. Since the federal estate tax rates are substantial, this poses a problem for people leaving property to someone who does not have U.S. citizenship.

There are two planning opportunities which do remain. The first is to institute a gift giving program where the U.S. citizen spouse gifts property to the resident alien spouse. The tax laws now allow a $100,000.00 per year gift tax free transfer when p roperty passes from a U.S. citizen spouse to a spouse who is not a citizen. By making these gifts you can structure your estate to minimize the need of the marital deduction upon the passing of the spouse who is a citizen.

The second opportunity is to revise your estate plan to include the use of a Qualified Domestic Trust that will, if all technical requirements are met, enable the surviving non citizen spouse to utilize the otherwise unavailable unlimited marital deducti on. The trust specifically requires that there be a U.S. citizen Trustee as well as requiring that a certain amount of the trust's assets be subject to U.S. jurisdiction.

Careful planning for families where one or both spouses are not U.S. citizens is required to shelter the assets from too much tax, too soon.