There are legal and tax consequences to marrying a non-citizen that you should be aware of. Working with one of the experienced estate planning attorneys with the Law Office of Bryan Fagan is essential for developing a strategy geared towards saving money and retaining as much property as possible in your estate. While paying taxes is important, ensuring that you are not paying a penny more than need be is critical to retaining wealth and helping those people that are beneficiaries under your various estate planning vehicles.
First, you should figure out whether your spouse qualifies as a resident of the United States. A test is used to determine the number of days that your spouse was physically in the United States for a specific calendar year. For spouses who are both citizens of the United States, there is an unlimited spousal transfer rule when it comes to financial gifts. This means that you can gift property and assets to your spouse on an unlimited basis and will not incur any taxes as a result. However, when your spouse is not a citizen there are limits to these kinds of transfers that you may initiate.
As soon as your spouse has established the United States as their domicile (physical presence without the intent to leave) then there will need to be some additional action on their part to leave the country for these provisions to become relevant. If your spouse is a permanent resident alien and has aa a green card in other words, then that would put them in a situation where your spouse has established their domicile in the United States. From that point, you and your spouse should figure out just how much property he or she owns that is located outside of the United States. How the property is owned: as an individual, jointly, or as part of a trust, is also important to know for estate planning purposes.
Keep in mind that if your spouse owns property outside of the United States and would like to transfer that property to you then the tax laws of the United States and possibly those of the other country would both be relevant. The other country may not care particularly what your spouse's United States-based will have to say about ownership of the property and your intent to transfer ownership of the property to your spouse. A possible solution to this problem would be to create more than one will- one for your property and assets in the United States and one for the country where your spouse owns the property.
In addition to hiring an attorney located in the United States, it could make a great deal of sense for you to hire a lawyer in the country where the property is located. An American attorney will not likely know the laws in that country very well and at the very least it could be helpful to have a lawyer "on the ground" in that other country. You never know when a hearing may be scheduled or if another issue with that property may arise. For representation for American estate planning, the attorneys with the Law Office of Bryan Fagan are here to help you and your family.
The type of property that your spouse is trying to transfer to you and the specific location of that property are important factors to consider when you are getting involved in estate planning matters. You can begin to do some research into how that country treats transfers of ownership of property to spouses and whether you and your spouse living in the United States make a difference when it comes to transferring property like this. There are a few countries that the United States has a relationship with when it comes to the transferring of property from spouse to spouse. These relationships minimize the kind of tax implications that may arise in other scenarios when it comes to estate or gift taxes. To find out what your exposure is on these issues you must determine what country is your spouse’s domicile.
What is the unlimited marital deduction for gifting?
In a situation where both you and your spouse are citizens of the United States, you can take advantage of an unlimited number of transfers of property to one another. The net result of this is that it is unlikely that there will be an estate or gift tax bill presented to either of you because of these transfers. The reason for this is that there is an exemption of more than ten million dollars for both you and your spouse which allows you both to pass property free of a tax burden. Unless your estate is extremely large then taxes usually do not figure into this equation.
When you or your spouse are not United States citizens then this benefit does not apply to your marriage. When you make gifts to your non-citizen spouse during your lifetime then that means that you may be subject to the federal gift tax. The spouse who is a citizen of the United States can gift more than $160,000 per year to the non-citizen spouse. When you do this, however, you should consider the tax implications as far as when this is done and how you are documenting the transfer. A financial planner/tax professional is a great person to have on your team to make sure that you are doing this in a way that minimizes your tax exposure.
How to handle transfers of property after your death
If you are an American citizen and would like to transfer property to your spouse as a part of your estate plan what are the essential pieces of information that you need to know? First, your spouse as a non-U.S. citizen can inherit property from you via a will in the same way as he or she would have been able to do if they were a citizen. The major difference, however, is that your spouse must pay taxes on what was inherited. The unlimited marital deduction does not apply to this situation. The idea that the property inherited could leave the country with your spouse without first being taxed is an issue that the federal government wanted to address and did so by placing an estate tax on this type of inheritance.
If your non-citizen spouse passes away before you do and you are named as the beneficiary of property under their will then that property would pass to you under the federal gift and estate taxes unlimited marital transfer exemption on all property that you all own around the globe. When you are thinking about estate planning for end-of-life situations then it would be wise to consider the lifetime gift and estate tax exemptions available under our tax laws. This is an efficient way to protect yourself and your spouse from paying unnecessary taxes and to hold onto as much of your wealth as possible.
What are some ways for you all to maximize your wealth positions?
If nothing else, you should be able to see that if you and your spouse are both citizens of the United States then certain opportunities exist that the two of you can take advantage of when it comes to avoiding taxes that a non-citizen is not able to avail themselves of. When you have a large estate there are a couple of different ideas that you and your spouse should talk over and then meet with an experienced estate planning attorney regarding.
It makes a lot of sense for your spouse to apply to become a citizen of the United States. By the time your spouse applies and is ultimately approved for citizenship he or she would then qualify for the unlimited marital tax deduction that we have been speaking about today. Say that you were to pass away in January of 2024. Your spouse would have until October 2024 (nine months later) to be approved for citizenship so that the unlimited marital deduction could apply. Since you and your spouse do not know when this nine-month period becomes relevant it is a good idea to start the citizen application process as soon as possible. It is unlikely that the timing would work out well enough for your spouse to begin the application process as soon as you pass away. Think ahead and begin this application process as soon as possible, in other words.
Another option to consider is a qualified domestic trust which would have to be approved by the Internal Revenue Service (IRS). The trust, rather than your spouse, would inherit the property. Your spouse would then be able to act as the only beneficiary under that trust and could receive income from it during their lifetime. Again, this is a key area that you would likely need to involve the help of an experienced estate planning attorney.
What is a Qualified Domestic Relations Trust?
As a workaround the laws limiting how much a United States citizen spouse and a non-U.S. citizen spouse may transfer to one another as far as property is concerned, a qualified domestic trust is one way option that can be chosen. The estate tax implications of making a mistake or transferring too much property throughout a lifetime can be dramatic. If you think of it in terms of what work can be done to offset the risk of losing thousands of tax dollars (or more) then it makes complete sense to see to it that these tax options are looked at in detail.
Right off the bat, you ought to know that a qualified domestic relations trust can be created within a will. Or your spouse can elect to create one of these trusts within 27 months of your having passed away. Your spouse would be named as the grantor within the language of the trust. There is a long list of benefits that could make this a worthy step for your spouse to take. However, many people may not think to move forward with a step like this given that you would already have passed away by this time.
If you create a qualified domestic trust before you pass away, then you can leave the property or assets to a trust rather than give it directly to your spouse. This, as we have already discussed, can help you to avoid the tax consequences of making a direct transfer of the property. For the cost of creating a simple trust, this can help you and your family avoid having to potentially pay a lot of money in taxes. Do not underestimate the circumstances that a trust like this could help your family organize your lives better and construct a long-term plan for shaping the well-being of your family. Your spouse would act as the only beneficiary under the trust and would receive a specific amount of money over time, usually an amount that would be under the estate tax or gift tax thresholds.
One thing to keep in mind when it comes to creating a trust of this sort is that the estate taxes inherent in effectuating a transfer like this cannot be avoided forever. For example, when your spouse dies and the property within the trust is distributed to your children or anyone else for that matter an estate tax will be levied against the property. Your spouse can avoid having to pay an estate tax but that tax will not be avoided forever, in other words.
What we have already learned about estate taxes still applies, however- if your spouse becomes a citizen of the United States then this estate tax would not be an issue. The trust could be dissolved at that point and all the property could be distributed to your now widowed-US citizen spouse with no estate taxes to be concerned with.
Closing thoughts on estate and gift taxes
With so many moving pieces when it comes to estate and gift taxes, it can become a cumbersome and difficult process for you and your family to handle matters related to this subject without the assistance of an experienced estate planning attorney. When you add into this situation that your spouse is not a United States citizen then the complexities become even more ample and numerous. For that reason, planning out how to handle these situations with an estate planning attorney can be extremely effective.
As a practical matter, you may be wondering what you can do right now to move the ball down the field and help you and your family prepare for matters related to estate planning. First, you and your spouse can perform some basic research into what it takes for your spouse to become a United States citizen. For those of you who are not aware, it is a process involved with becoming a citizen. An immigration attorney may be a good person to talk to about the citizenship application process. Internet searches can likely inform you of the basics associated with applying to become a citizen as well as the probable waiting time for this application.
Any additional information, documentation, or steps that you need to follow through on will be found on various government websites. You can talk to people that you know who have been through the process. There may be information that is out there which is not included on a government website which can be helpful to know in advance.
Otherwise, creating a trust would appear to be the most direct way to avoid paying estate taxes for property transferred to your spouse upon your death. The creation of trust is something that takes planning. However, it is not something that would take years to do. An experienced estate planning attorney who is aware of your goals and has helped you to map out a plan to accomplish those goals can work with you on creating this trust. Placing the relevant property in the trust is the last step in that process.
All these things can happen for you and your family, but you would first need to speak with an experienced estate planning attorney to get the ball rolling. The attorneys with the Law Office of Bryan Fagan have helped families across southeast Texas conserve their assets and grow wealth simultaneously. Our estate planning attorneys know the law and can help you to maximize your wealth positions equitably. Do not assume that the steps outlined in today's blog post are beyond you and your capabilities. For the betterment of your family please reach out to our office today for a free-of-charge consultation. We can show you how to plan when it comes to your estate.
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