A couple in which one spouse is not a U.S. citizen may need to engage in special estate planning.

It is important to note that the general estate planning rules do not change if the surviving spouse is a U.S. citizen. In such a case, the unlimited marital deduction applies so that there is no estate tax on the transfer of assets to the citizen spouse. The unlimited marital deduction protects all transfers between spouses from tax.

However, some of the rules change when the surviving spouse is a non-citizen, and the rules will vary depending on whether that non-citizen spouse is a U.S. domiciliary.

The Test for Domicile

The federal government considers someone a U.S. domiciliary if that person lives in the U.S. and has no definite present intent to leave. The intent required has also been described as having the present intent to make a permanent home in the U.S. A variety of factors are examined to determine someone’s intent. It is relevant whether the person has a home or multiple homes in the U.S. and how long they stay in the U.S. compared to other countries. Family ties, membership in organizations, and the location of business and social contacts are also important in determining where a person intends to live. Other significant factors include where the person is registered to vote and whether the person has a U.S. driver’s license. The location of one’s personal possessions and bank accounts is also pertinent to determine one’s intended domicile. A statement of intent to reside in the U.S. made in a visa application, estate planning documents, or other papers is also considered.

A person who has had a green card for more than 7 of the last 15 years is presumed to be a U.S. domiciliary.

If the Surviving Spouse Is a Non-Citizen Domiciliary

The unlimited marital deduction will not apply when the surviving spouse is a non-citizen. Fortunately, the federal government allows U.S. domiciliaries to claim the federal estate tax exemption. This exemption allows a decedent to transfer a certain amount of money to beneficiaries free of tax. The amount of the federal estate tax exemption for 2024 is $13.61 million and adjusts each year for inflation. However, the exemption is set to drop to $5 million in 2026, so couples should regularly review and update their estate plans to keep up with changes.

Essentially, if one spouse is a non-citizen but a domiciliary, estate planning can proceed as if both spouses were citizens when the estate is valued at less than the federal estate tax exemption rate. The estate will still be protected from tax even without the advantage of the unlimited marital deduction. If the estate has a value above the federal estate tax exemption rate, the amount in excess of the exemption will be taxed. One way to avoid undesirable tax consequences is to place the excess amount in a qualified domestic trust (QDOT). QDOTs will be discussed in more detail below.

If the Surviving Spouse Is a Non-Citizen Non-Domiciliary

As with domiciliaries, the unlimited marital deduction will not apply when the surviving spouse is a non-citizen non-domiciliary. Unlike domiciliaries, non-domiciliaries do not receive the federal estate tax exemption. Instead, they receive only a $60,000 exemption. Any amount they receive above $60,000 from their spouse’s estate will be taxed at a rate of 40%. A QDOT may also be employed in this situation to avoid high tax rates.

Qualified Domestic Trusts (QDOT)

A QDOT protects any funds within the trust from an immediate estate tax. Rather than completely avoiding the estate tax, a QDOT will defer the estate tax until the surviving spouse passes away. But if the surviving spouse becomes a U.S. citizen before death, the remaining assets in the QDOT will be protected by the unlimited marital deduction.

To be a QDOT, the following requirements must be met:

1. At least one trustee must be a U.S. citizen or U.S. corporation;
2. The trustee must have the right to withhold any distributions from the trust, except distributions of income;
3. The trust must be structured as a power of appointment trust, a qualified terminable interest property trust, a qualified charitable remainder trust, or an estate trust;
4. One of the trustees must be a U.S. bank if more than $2 million is transferred to the trust (or else the trustee must post a bond equal to 65% of the value of the property transferred to the trust with the IRS); and
5. No more than 35% of the trust property can be foreign real property if less than $2 million is transferred to the trust (or else the trust will be treated as holding more than $2 million).

Furthermore, within 9 months of the first spouse’s death, an irrevocable QDOT election must be made on the deceased spouse’s federal estate tax return. The QDOT does not have to be created before the first spouse’s death or in the spouse’s will. It can be created by the surviving spouse after the first spouse’s death so long as the trust is funded prior to the due date of the federal estate tax return. Only funds in excess of the applicable federal estate tax exemption should be placed in the QDOT.

Once the QDOT is created, distributions of income are tax free, but distributions of principal are taxed at estate tax rates. If the trustee distributes principal, the trustee must file an annual statement with the IRS and pay federal estate tax on the distribution. The estate tax may be waived when a “hardship” can be proven, but this is rare. A withdrawal is made because of a “hardship” if it was made in response to an immediate and substantial financial need relating to the spouse’s health, maintenance, education, or support. However, if the surviving spouse is reasonably able to pay the amount, a hardship will not be found. It is deemed unreasonable to force the sale of closely held business interests, real property, or tangible personal property to cover the amount of a hardship. In general, distributions of principal should be avoided, but distributions of income may be freely made.

Davis Law Group Can Help

As you can see, the issue of non-citizen spouses in an estate plan is a complicated matter, with lots of issues to consider and act upon in order to make sure your wishes are carried out and your spouse is taken care of. Don’t leave these matters to the state during probate – act now and create a robust estate plan that protects you, your spouse, and your assets. Contact our team of highly experienced estate planning attorneys to walk you though each possible scenario and outcome so that you can both have peace of mind.