When couples are estate planning, most want to take advantage of all available tax deductions and credits. The concept of estate tax portability allows many higher net worth couples to minimize their total estate taxes due. But portability is little help when a couple includes one U.S. citizen and one non-citizen non-permanent resident.
What Is Estate Tax Portability?
Estate tax portability allows a surviving spouse to “keep” any portion of the deceased spouse’s estate tax exemption that his or her estate does not use. In other words, the deceased spouse’s estate may “use up” only half of his or her exemption because that is how much the estate is worth. The estate executor can elect on the tax return to give the rest of the exemption amount to the surviving spouse. When the surviving spouse passes away, he or she will have more than the usual exemption amount ($11.18 million in 2018) available. As a result, the surviving spouse’s estate is less likely to owe estate taxes.
Can Non-Citizens Take Advantage of Portability?
Unfortunately, couples that include a non-citizen non-U.S. resident may not be able to take advantage of estate tax portability. The estate of a deceased non-citizen cannot elect to give the surviving citizen spouse any of the remaining estate tax exemption. In addition, the non-citizen’s exemption is only $60,000, so the estate may owe significant taxes depending on the size of the estate.
If the citizen spouse dies first, then his or her estate cannot take advantage of the marital deduction for any transfers made to the non-citizen spouse. The citizen’s estate could end up owing significant estate taxes due solely to giving property to the spouse.
To plan ahead for the likelihood that the citizen’s estate cannot use the marital deduction, you may consider setting up a qualified domestic trust. A qualified domestic trust, or QDOT, allows a citizen to give property to a non-citizen and still take advantage of the marital deduction.
In addition, you should plan for the likelihood that the non-citizen’s estate cannot use estate tax portability either. Your planning may involve the citizen spouse taking ownership of property instead of the non-citizen spouse, or setting up some form of trust to remove property from the non-citizen’s estate. You probably need professional advice to accomplish your goals due to the complicated IRS and state rules surrounding taxation and distributing property of non-citizens in the United States. If you need help, reach out to a qualified estate planning lawyer today.
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.