Are you an American citizen married to a non-American spouse? Or are you and your spouse American green card or visa holders residing in the United States?
If you answered yes, then you ought to pay close attention to the U.S. property tax rules which can result to enormous tax bill when there is no proper planning.
Lately, we began working with an American client who owns a substantial estate and also resides and works in the U.S. His wife is a citizen of Canada and has a U.S. green card but isn’t a U.S. citizen. The couple has no children yet.
During a recent tax planning session, our American client was stunned to discover that a good number of gifts to and from his wife may be subject to lofty tax rates of about 40%. This same high rate may also apply to every inheritance to the surviving spouse by the deceased spouse. The shock was quite understandable since the rules are not the same for spouses who are both citizens of America.
Majority of Americans leave the greater part of their property to their surviving spouse, because a lot of them can be transferred with no tax consequences. This is especially so, when it is under unlimited marital deduction.In this case, there will be no estate tax on the transferred property if a person leaves his or her property to a partner, irrespective of the size of the property.
Frankly, the IRS is willing to delay levying an estate tax, until the death of the second spouse.Likewise, married couples are at liberty to send gifts to each other without the fear of incurring gift taxes.
Incidentally, due to the U.S. Supreme Court’scurrent DOMA decision, same-sex couples are now allowed to join heterosexual couples in the transfer of their estate to their spouse at will, without the fear of estate or gift taxes.The only requirement is that both spouses ought to be citizens of America.
When it comes to transfers whereby one of the spouses isn’t a citizen of America, the IRS has a different point of view.A foreign spouse is not a beneficiary of the unlimited marital deduction treatment because the IRS fears that the non-American citizen may move to another country thereby completely eludingU.S. estate taxes.
In the absence of the marital deduction, recent law allows only the first $5,430,000 worthof assets to be transferred without tax.That is to say, any asset inheritedby a non-citizen spouse is subject to an estate tax of 40% after the lifetime exemption of $5,430,000 is exhausted.
What then should you do if you are married to a non-American citizen and have assets whose worth is over the exemption threshold?
Let us consider our client for example. His wife could become a citizen of America before he dies, or a Qualified Domestic Trust (QDOT) could be established between them. A QDOT defers the estate tax pending the demise of the foreign spouse and permits that an annual income stream be paid to her. Besides, it can buy the surviving spouse enough time to obtain U.S. citizenship.
The strategy of gift giving can also be used to transfer aparticular amount of assets to the non-American spouse every year with limit as of 2015 being $147,000. This will slowly reduce the size of the taxable asset while protecting them from the liability of federal taxes.
On the other hand, our client can also profit from the marital advantage under the Canada-U.S. tax agreement. However, this alternative cannot be used together with the QDOT deferral.
Our client has now learned that there are certain strategies and legal plans that can help non-citizen couples to prevent the loss of 40% of their wealth through irrelevant taxes, if set up beforehand.
If you would like to learn more on this topic, or you would like to discuss your own exceptional condition, contact us immediately for a complimentary analysis.