U.S. Gift and Estate Tax for Non-Citizens – What You Need to Know

Compliments of Our Law Firm,

Written By: The American Academy of Estate Planning Attorneys

In the United States, any federal gift and estate tax due from an estate must be paid during the probate of the estate and prior to assets being distributed to beneficiaries and/or heirs of the estate. The gift and estate tax rules are complex enough for a U.S. citizen; however, when the decedent and/or the surviving spouse is NOT a U.S. citizen, the rules become considerably more difficult to understand and follow.

This is even more reason to have at least a basic understanding of some of the major differences between how U.S. citizens, non-citizen residents, and nonresident non-citizens are treated with regard to federal gift and estate taxation.

Who’s Who?

In the U.S., your citizenship and/or residency status decides your tax treatment. Therefore, it is important to understand where you fit. Most taxpayers are U.S. citizens, either by birth or by naturalization. Others are not citizens but are legal residents of the United States.

For taxation purposes, a non-citizen who lives in the United States is treated the same way as a citizen. A non-citizen, nonresident is someone who is not a citizen and does not live here. For tax purposes, non-citizen, nonresidents are often referred to as “nonresident aliens”, or “NRAs.” NRAs are not treated the same as citizens and residents when it comes to federal gift and estate taxation.

How Are U.S Citizens and Residents Taxed?

After death, the assets of the decedent’s estate are identified and valued. The taxable estate consists of everything owned by the decedent, regardless of where those assets are located. The value of those assets, combined with the value of gifts made during the decedent’s lifetime, is potentially subject to federal gift and estate tax at a rate of 40 percent. Fortunately, each taxpayer is entitled to exclude up to the lifetime limit which was set at $5 million but adjusted annually for inflation. For 2016, the lifetime exclusion limit is $5.45 million.

How are Nonresident Aliens (NRAs) Taxed?

A nonresident alien is taxed only on property situated in the United States; a NRA is not entitled to the typical lifetime exclusion – this exclusion is only $60,000.

How Is Someone with Dual Citizenship Taxed?

Dual citizenship means you are a citizen of two countries, for example Argentina and the United States. As a general rule, citizenship in another country does not change your tax obligation in the U.S., meaning you will be taxed as a U.S. citizen.

How Does the Marital Deduction Work?

For a U.S. citizen or resident, the marital deduction allows you to leave an unlimited amount of assets to a spouse upon your death tax-free. The unlimited marital deduction is not available if the surviving spouse is a non-citizen unless the assets are left in a Qualified Domestic Trust, or QDOT. The reason for this is simple.

If a citizen inherits a large estate, that estate will eventually be taxed when the assets are passed down either as gifts or at the time of the survivor’s death. If, however, that same large estate is left to a non-citizen there is no guarantee that those assets will be taxed down the road, making it necessary to tax them at the time they are transferred. A QDOT alleviates these concerns by ensuring that the property does not escape the country without taxation. A QDOT must have a U.S. citizen or financial institution as a Trustee who must have the legal authority to withhold taxes. The QDOT can periodically pay the trust's income to the surviving spouse; however, any other distributions must have estate tax withheld unless hardship can be shown. Only if the surviving spouse becomes a U.S. citizen can the assets be removed from the QDOT.

As the world becomes smaller, it is becoming more and more common for people to marry someone from another country given the ease with which we now travel across borders. For a non-citizen, or the spouse of a non-citizen, estate planning takes on a heightened importance. If you are a NRA, or you plan to leave part, or all, of your estate to a non-citizen spouse, it is imperative that you consult with an experienced estate planning attorney early on to ensure that you, your spouse, and your assets are protected.

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