ESTATE PLANNING WITH A FOREIGN TWIST!
George is an American citizen and his wife, Sofia, is a citizen of Columbia. George and Sofia, who have two adult children and five grandchildren, need estate planning guidance. Are there any special considerations?
The short answer is “yes.” But the long view is that the couple may still be able to meet their main estate planning objectives.
When both spouses are U.S. citizens
When both spouses in a legal marriage are U.S. citizens, the family may benefit from various estate tax breaks that were enhanced by the Tax Cuts and Jobs Act. (TCJA). This includes the:
Unlimited marital deduction. A transfer from one spouse to another — whether it’s during life or after a spouse’s death — is exempt from federal gift and estate tax. An unlimited amount of assets can be transferred.
Gift and estate tax exemption. The federal exemption covers amounts that are bequeathed to nonspouse beneficiaries such as your children. The generous estate tax exemption of $5 million was doubled to $10,000 million by the TCJA, subject to inflation indexing, for 2018 through 2025. The amount for 2019 is $11.4 million. Under the unified gift and estate tax exemption, a spouse may also benefit from a lifetime gift tax exemption of $11.4 million in 2019. However, using the lifetime gift tax exemption erodes the available estate tax exemption.
Annual gift tax exclusion. This exclusion shelters from tax gifts made during your lifetime without affecting your lifetime gift tax exemption. In 2019, you can give $15,000 per recipient without paying any gift tax. The exclusion is doubled to $30,000 per recipient if you and your spouse properly “split” the gift.
When one spouse isn’t a U.S. citizen
Estate planning can become considerably more complicated when one or both spouses aren’t U.S. citizens. First, it’s important to ascertain the status of both spouses. The IRS defines a U.S. resident for federal gift and estate tax purposes as someone who’s domiciled in the United States at the time of death. One becomes domiciled in a place by living there, even briefly, with a present intention of making that place his or her permanent home.
Whether you’ve established domicile in the United States depends on several factors. The factors include time spent in the country vs. time spent abroad; the locations and relative values of your residences and business interests; visa status; community ties; and locations of family members.
If you’re a resident of the United States, but not a citizen, the IRS treats you similarly as it would a U.S. citizen. That means you can enjoy the fruits of the federal gift and estate tax exemption and annual gift tax exclusion, including the tax benefit of gift-splitting. However, for a noncitizen who isn’t a U.S. resident (a nonresident alien), the estate tax exemption plummets from $11.4 million to a comparatively miniscule $60,000.
Thus, having U.S. property holdings can result in a large estate tax bill when a nonresident alien dies. For this purpose, taxable property includes real estate and tangible personal property (such as cars, boats and works of art) located in the United States.
Determining the location of intangible property — such as stocks, bonds and partnership interests — creates additional complications. For example, if a nonresident alien gives a family member stock in a U.S. corporation, the gift is exempt from U.S. gift tax. But a bequest of that same stock at death is subject to estate tax. Conversely, a gift of cash on deposit in a U.S. bank is subject to gift tax, while a bequest of the same cash would be exempt from estate tax.
Transfers to a noncitizen spouse
Let’s return to the example of George, the U