Without a little advance knowledge, leaving your investment real estate to your spouse could create problems later on. There are two primary issues that might arise, depending on your circumstances: (1) exceeding the estate tax exemption, and (2) burdening a non-citizen spouse with a tax bill.
Exceeding the Estate Tax Exemption
In the United States, the estates of deceased people must pay taxes on the total value of the estate if it exceeds a certain amount. An estate also may owe taxes if the deceased person made a number of large lifetime gifts. Until 2026, the estate and gift tax exemptions are $11.18 million for an individual and $22.36 million for a couple – as long as you and your spouse are U.S. citizens or permanent residents (see below). This means that if you have a combination of lifetime gifts and total estate value on death that do not exceed $11.18 million, you will not owe estate taxes.
If you own investment real estate that you plan to leave to your spouse, the real estate’s value could take you over the exemption limit. Especially in California’s hot property markets, a building could spike in assessed value. This will leave your estate paying thousands of dollars in taxes, money that could have gone to your spouse. You have a few options to avoid getting in this situation, such as leaving the real estate to a trust or making sure your estate administrator elects estate tax portability for your spouse. Unfortunately, if your spouse is not a U.S. citizen or resident, you cannot use estate tax portability or the marital exemption.
Non-Citizen Spouses and Taxes
The U.S. government requires non-U.S. citizen, non-resident spouses to pay considerably higher estate tax rates than citizens and permanent residents. If you leave your investment real estate to your spouse, he or she may have to deal with (1) estate taxes on the property after you pass away, and (2) increased value to his or her estate because of the valuable property. Your spouse could face increased income taxes because of his or her citizenship status if the property is rented out to tenants. If the real estate is outside California, your spouse may face an inheritance tax.
Many of these possible tax problems for non-U.S. citizen, non-residents can be resolved with careful advance planning. For example, you could create a qualified domestic trust (QDOT) and make the investment property a trust asset. Consult a lawyer for advice on how to proceed.
Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.