Rupa Pereira
By Rupa Pereira
We’re down to the final installment of this series clarifying our financial picture post death. In the prior two editions, I introduced concepts such as Estates, Trusts Probates to set the stage of how wealth is transferred upon death in the US. It assumed that both the deceased and beneficiaries are US citizens. They benefit from the generous provisions in the US Tax law. In this section, we’ll look at scenarios when non-US citizens are involved.
When there are non-US-Citizen family members whose Estate is in question or who are beneficiaries in an Estate/Financial Assets or Trusts, it can significantly complicate estate planning.
A few important areas:
Marital Deduction:
Generally, the unlimited marital deduction, which allows assets to pass between U.S. citizen spouses without federal estate tax, does not apply when the surviving spouse is a non-U.S. citizen. When both spouses are US citizens, typically, after the death of the first spouse, the surviving spouse receives all the estate without any taxes due. Based on the value of the surviving spouse’s estate at death and based on prevailing law, Estate tax may be due if it exceeds the threshold.
Non-US Citizen spouses don’t get to enjoy the unlimited marital deduction. To address this, a special trust called a Qualified Domestic Trust (QDOT) is often used. A QDOT allows the deceased spouse to leave assets to the non-U.S. citizen surviving spouse while deferring estate taxes.
Estate Tax Implications:
Non-U.S. citizens may have different estate tax exemptions compared to U.S. citizens. Per recent legislation, the Estate Tax has been held to a $15M exemption per US Citizen with a combined exemption limit of $30M between US Citizen spouses, but that for a non-citizen beneficiary is a measly $60K and is not indexed for inflation. Which means the estate exceeding that amount may be taxed up to a maximum rate of 40%. Note, this extends to those non-resident individuals that no longer reside in the US but have appreciated assets that are sourced in the United States.
Gift Tax Implications:
Gifting rules can also be more complex. For instance, the annual gift tax exclusion for gifts to a non-U.S. citizen spouse is lower than that for a U.S. citizen spouse.
Tax Filing and Reporting Obligations:
Whenever there’s a transfer of wealth through death or gifting across borders, there may be tax reporting obligations. Failure to file these forms in a timely manner may result in huge penalties.
International Considerations:
If the deceased or surviving spouse has assets in other countries, the estate planning process can become even more complicated due to differing legal systems and tax laws.
This is when we enter the turbulent waters of cross-border taxation. Tread carefully in this space, as what applies in each jurisdiction doesn’t necessarily carry over to the other country where you have financial or social ties with.
Residency and Domicile:
Determining the residency and domicile status of the non-U.S. citizen is crucial, as it can significantly impact tax liabilities. There are certain technicalities between what is considered residency and what is domicile, especially when it comes to how certain forms of income and assets are taxed.
Multiple wills (per jurisdiction)
When a non-U.S. citizen owns property outside of the United States, the transfer laws of the country where the property is located may affect how it is distributed. The Last Will and Testament with a situs in the United States may not be recognized by the country in which the property is located as a valid document.
Therefore, it may be advisable to create multiple wills; each one dealing exclusively with money or property located in the country of situs.
In summary, as you venture into newer investment, employment, life experiences and cross out those items on your bucket list, know that life is short and tangible while your wealth doesn’t have to be. It just has to be hassle free for your loved ones.
It’s about ensuring that when you do eventually kick that bucket, you do so with the peace of mind that comes from knowing you’ve left things in order.
Think of it as your final mic drop, your last chance to orchestrate events from beyond the grave, and to leave a lasting legacy for those you leave behind.
A Desi elder,
with kin far and near,
Whose wealth spanned from here to pardes, free and clear.
For rupees and gold,
Should old tales unfold,
A clear will and trust,
to banish all fear!
Rupa Pereira is a CFP, EA, CSLP and an Advice-Only Planner and Tax Professional based in North Carolina. She specializes in cross-border matters and all things financial planning. Contact: info@fwjplanning.com
