If your spouse isn’t a U.S. citizen, there are special estate and financial planning issues you should be aware of. 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.
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 (this is commonly referred to as the “unlimited marital deduction.”). If your spouse is a noncitizen however, your annual gift is limited to $143,000 for 2013. Gifts to your noncitizen spouse larger than the annual amount will be considered taxable gifts. Only when you have gifted over $143,000 to your noncitizen spouse will you actually have to pay federal gift taxes.
All assets left upon death to a U.S. citizen spouse qualify for the unlimited marital deduction. Noncitizen spouses don’t 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 $5.25 million in 2013 without having to pay federal estate taxes. This means that if your estate is worth more than $5.25 million, it may be subject to federal estate tax even if you distribute the overage amount to your noncitizen spouse.
If your estate is worth more than $5.25 million, you may want to consider having the amount in excess of the $5.25 million pass to the surviving noncitizen spouse in a qualified domestic trust (or “QDOT”). A QDOT is a marital trust that is designed to qualify any assets passing to the surviving noncitizen spouse for the marital deduction during the survivor’s lifetime. Only after the death of the surviving noncitizen spouse will federal estate taxes be imposed.
There are many requirements necessary for this type of trust to qualify for this special tax treatment. They include:
If your estate is worth more than the federal exemption amount and your Will or Revocable Trust doesn’t provide for a QDOT, your noncitizen spouse can transfer the inherited excess amount to a QDOT prior to the filing of your estate tax return and no later than one year after the due date of the return.
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:
* The tax information herein is not intended to be used and cannot be used by any taxpayer for the purpose of avoiding tax penalties.
Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor.
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