When Your Beneficiary is not a U.S. Citizen

Recently a very good friend and his wife came to me to update their wills and estate planning.  My friend’s wife is not a U.S. citizen.  One of their first questions involved whether or not a non-citizen could inherit property from an estate.  Very simply, if your spouse isn’t a United States citizen, some special legal rules may affect your estate planning. But for the most part, you can proceed just as if your spouse were a citizen.

     When it comes to the basic estate planning steps that just about everyone should take, it doesn’t matter whether or not you or your spouse are citizens. Both of you should:

• Make wills or living trusts to leave assets that you have in the U.S. 
• Name beneficiaries for your retirement accounts.
• Make durable powers of attorney for finances and for health care.

     One threshold question you may have is simply whether you can leave property to someone who isn’t a U.S. citizen. The answer is yes; non-citizens can inherit property just as citizens can. So when you make your will or living trust, or name beneficiaries for your retirement accounts or life insurance policies, there is no problem with naming your non-citizen spouse.

     Most people don’t need to worry about the federal gift and estate tax.  For deaths in 2014, only those who leave more than $5.34 million are potentially subject to Federal tax.  The threshold for New York State inheritance tax is one million dollars.

     The tax is imposed on transfers of property both during life and at death. The tax rate is the same in both circumstances. Under current law, everyone gets to transfer $5.34 million of property without paying any gift and estate tax. It isn’t collected until after someone’s death, when the value of all property that person gave away or left is totaled up.

     Assets left to a surviving spouse are not subject to federal estate tax, no matter how much they are worth—If the surviving spouse is a U.S. citizen. This rule is called the unlimited marital deduction. It is in addition to the individual exemption (currently $5.34 million) that everyone gets.

     The marital deduction, however, does not apply when the spouse who inherits isn’t a U.S. citizen, even if the spouse is a permanent U.S. resident. The federal government doesn’t want someone who isn’t a citizen to inherit a large amount of money, pay no estate tax, and then leave the country to return to his or her native land.

     Still, keep in mind you can leave assets worth up to the exempt amount (again, $5.34 million for deaths in 2014) to anyone, including your non-citizen spouse, without owing any federal estate tax. And if the non-citizen spouse dies first, assets left to the spouse who is a U.S. citizen do qualify for the unlimited marital deduction.

     If your spouse is a citizen, any gifts you give to him or her during your life are free of federal gift tax. If your spouse is not a U.S. citizen, however, the special tax-free treatment for spouses is limited to $143,000 a year (2014). This amount is indexed for inflation. That’s in addition to the $5.34 million you can give away or leave to anyone without owing federal gift/estate tax.

     If you have so much money that you are worried about estate tax, there are two main strategies to consider.  One involves becoming a citizen, the second involves establishing a specific type of trust.  In a later blog we will discuss the available options.

     So, if you are married to a non-U.S. citizen, make sure you let your attorney know, so in planning an accurate analysis can be done.