Estate Planning for Non-Resident Aliens and Non-Citizen Spouses
Non-Resident Aliens are not treated as advantageously as US citizens under the estate and gift tax rules by the IRS. For a nonresident non-citizen (“nonresident alien” or “NRA”) the applicable estate tax exemption is limited to $60,000, in comparison to $5,340,000 for a US citizen. Thus, estate tax is due when a nonresident alien’s estate transfers U.S. situs assets above $60,000. The estate tax rate is 40%.
There are various estate planning structures a nonresident alien could set up in order to limit their estate tax liability and protect their assets. The most traditional form of planning for NRAs is to use a foreign corporation structure. This structure uses a foreign entity as the parent company of a domestic LLC. The domestic LLC holds the US situs assets. Federal and state individual income taxes will apply, but the structure provides possible US estate tax protection.
US Citizens with non-citizen spouses have several options to choose from when it comes to estate planning. The first option would be for the spouse to become a citizen. The spouse can even do this up until nine months after the date of death of the citizen spouse. There are situations in which this may not be in the best interest of the non-citizen spouse. In those cases, the citizen spouse will have their full $5,340,000 exemption to use. If their assets are over the exemption amount, they can use the annual gift exclusions to lower the total estate or they can create a Qualified Domestic Trust (QDOT).
The annual gift exclusion for gifts to non-citizen spouses is greater than the regular annual gift exclusion of $14,000. The exclusion for 2014 is $145,000. Taking advantage of this exclusion could allow for a gradual transfer of assets to the non-citizen spouse and a gradual reduction of the total estate to the point where it comes in under $5,340,000.
The other option is to use a QDOT. A QDOT is a trust established either by the citizen spouse during their life, or by an executor or surviving spouse after the death of the citizen spouse. This trust would hold the assets inherited by the non-citizen spouse. No estate taxes would be due on those assets until the spouse draws from them or passes away. The assets are then added back to the estate and the estate tax is due at that point. QDOTs do not eliminate or reduce the estate tax liability, only defer it until a later time. However, if the spouse becomes a US citizen during this time period, no estate tax would be due and he or she could take all the assets in the QDOT.