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Estate Planning for Non-US citizens

Estate Planning for Non-US citizens

By Parag Patel Esq.

Non-US citizens (greencard holders or H-1 visaholders) are severely discriminated against by US estate tax laws.

Since estate taxes are based on the size of your estate. It is estimated that without proper planning, you will lose 15 percent to 75 percent of your estate, because the government will take it. Estate taxes alone are 46 percent of an estate worth over $3.5 million.

For both US citizen spouses, a $3,500,000 exemption is available. If the estate plan is properly structured, a $7 million exemption is available per couple.  H-1 visaholders have a smaller $65,000 exemption and a $125,000 exemption per couple.

Furthermore, a large number of people have non-US citizen spouses (either greencard holders or H-1 visaholders) and these couples are adversely affected by discriminatory tax laws.

US citizens distribute unlimited amounts of property to their spouses (through lifetime gifts and/or transfers at death) by reason of the unlimited marital deduction. The theory behind the unlimited marital deduction is one of tax deferral, not tax avoidance. This is because the marital deduction only postpones collection of the estate tax, with the assumption that property received by a spouse under the marital deduction will ultimately be included in the gross estate of the surviving spouse.

To prevent the loss of tax revenue from a non-US citizen, who may decide to “take-the-money-and-run” back to a foreign country and beyond the reach of the IRS after the death of their spouse, the tax law denies any estate tax marital deduction for property passing to non-US citizen spouses.

Thus, there are only three choices available:
– set up a Qualified Domestic Trust (QDOT), a trust that provides the non-US citizen surviving spouse with distributions of income from the trust assets.
– to pay estate taxes on first death
– to become a US citizen

In light of all of the above, sophisticated estate planning for non-US citizens is strongly recommended and a competent tax attorney should consulted.