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Estate planning is a must do for all couples. And for many in the United States it’s fairly straightforward; create a simple will which leaves all assets to the surviving spouse. Unless one spouse is not a U.S. citizen. Then the couple could find themselves looking at three major problem areas.
These estate planning pitfalls are somewhat technical, so we’ll use a hypothetical case of a married couple living in the United States “Sam” and “Olivia” to illustrate.
Olivia is an Italian citizen and Sam is a U.S. citizen. Olivia is an artist and does not have a consistent income. Sam works in a large corporation and has a healthy income. They own a home together worth $400,000. They have simple wills they did themselves. What are they missing?
No unlimited marital exemption
When you are married, the presumption is that you and your spouse share assets. You can transfer money in and out of savings accounts, brokerage accounts, checking accounts, and the like. Yes, there are exceptions, but for the majority of couples the presumption is almost all assets are shared.
That also means in most cases that at the death of the first spouse, all assets get transferred to the surviving spouse. If the couple are both U.S. citizens, there are no estate taxes due on this transfer.
But in case of Sam and Olivia, our fictional couple, that isn’t true. If Sam dies first and transfers all assets to Olivia, she will owe estate taxes since she is not a U.S. citizen. There is no unlimited marital exemption which would delay estate taxes from being due until her death.
Why? In theory Olivia could take her inheritance from Sam and go back to Italy and die there not owing U.S. taxes. So, the law is designed to allow the federal government to get its money at the first death.
If Olivia dies first, Sam being a U.S. citizen, gets the benefit of the unlimited marital exemption. He will be able to inherit from her and not owe taxes.
Since no one knows who will die first, this is an issue that needs to be addressed when couples of differing citizenship do their estate planning.
Jointly owned property is not split 50-50
Not only do estate taxes apply, but the estate itself could be bigger than expected because of rules about how property is treated when a spouse is not a U.S. citizen.
With a couple where both spouses are U.S. citizens, joint property is assumed to belong to each spouse equally. If one spouse is not a citizen, that is not true.
Our hypothetical couple, Sam and Olivia, jointly own their home. If they were both citizens, it would be considered to be owned 50-50 or $200,000 each. Since Olivia is not a citizen, if Sam dies first, the whole $400,000 home value is considered to be includable in his estate, not just half.
Olivia must prove that she helped pay for the house in order to take some ownership of their home. Let’s say she has paid $25,000 towards the mortgage since they have owned the home. In that case, only the $25,000 that Olivia contributed is excluded from the Sam’s estate and his estate will show $375,000 value.
This is a huge difference for estate planning purposes. You cannot just plan on each spouse owning half of a house, you actually have to look at what each person contributed.
No unlimited gifting
The ability for spouses to make gifts to each other and buy property together is one that many couples take for granted. But again, if one of the spouses is not a U.S. citizen, gifting can be complicated.
Spouses buy gifts for each other (or at least they should). But if you are married to a non-citizen and you make a gift to your spouse that is valued over $175,000 in a calendar year (the 2023 limit), you will pay gift tax on it.
This rule covers gifts of money, jewelry, and other gift items commonly exchanged. It also applies to the purchase of a joint property.
If a couple buys a property together and the U.S.-citizen spouse pays the entire purchase price, 50 percent of the value is a gift.
So, the purchase of a home valued at $350,000 or more with your non-citizen spouse would trigger a taxable gift. Why? Because the gift threshold for 2023 is $175,000.
Let’s assume Sam and Olivia paid $360,000 for their home when they bought it and Sam’s savings paid for all of it. In the eyes of the law Sam then made a gift to Olivia of $180,000 for the house, even if they owned it jointly, since he paid for it 100 percent.
Now using 2023 limits, he could gift $175,000 to Olivia with no tax due. However, since the gift was technically $180,000, there’s an extra $5,000 to be accounted for. That $5,000 would either be a taxable gift in the year it was made, or it would come off Sam’s lifetime gift exemption. Either way, it is something that the couple needs to be aware of.
The bottom line
To be clear, U.S. citizens and permanent residents (green card holders) are currently entitled to the federal estate tax and lifetime gift tax exemptions. But if one of the partners is a non-citizen, the wealth transfer rules that can be taken for granted by many couples no longer apply.
So, make sure that your financial planner, attorney, and any other professionals involved in your estate plan are aware that you or your partner or both of you are not U.S. citizens. The planning you do will be inaccurate otherwise and not be worth what you paid for it.
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This article was first published in April 2017. It has been updated.
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