Which assets are community property and which are separate property can become very important when a non-U.S. citizen and a citizen are making estate plans. The previous blog discussed the difference between these two types of property. Now we will delve into the reason why a non-citizen and citizen couple should try to own as much of their property as possible as community property.
A non-citizen and citizen married couple share their estate and gift tax exemption amounts as to community property only. U.S. citizens and permanent residents have much larger allowable exemptions than non-citizen, non-residents ($11.18 million compared to $60,000). With the ability to use the combined exemption on community property only, a non-citizen surviving spouse will pay lower taxes if more of the couple’s property belongs to the community. If the surviving spouse inherits the separate property, he or she could owe many thousands in taxes.
Often, these couples place some property in a qualified domestic trust (QDOT), either during their lifetime or upon the death of the U.S. citizen spouse. The estate of the deceased spouse does not have to pay estate taxes on property that goes to a QDOT on their death, because the property is no longer part of the estate. The QDOT also postpones the surviving non-citizen spouse’s need to pay taxes. Another option with a similar result is a “bypass trust”.
At the beginning of 2018, the estate and gift tax exemption for citizens doubled. This increase expires in 2026. While the increase makes running out of exemption dollars less of a problem for a non-citizen spouse, couples still may want to set up a QDOT or bypass trust. The increase could expire before one of them passes away. Further, couples should still maximize the amount of property considered community property, if possible.
In California, real estate can be owned as community property with rights of survivorship or joint tenancy. The two are very similar – in both cases, the spouses own the property jointly and one owns the entire property when the other passes away. While both of these ownership methods avoid probate (because the property automatically goes to the surviving spouse), they can trigger the requirement that the estate file an estate tax return if the citizen spouse dies first.
Depending on which kinds of property you own and if it is separate or community property, you may have different estate planning needs as a citizen and non-citizen couple. If you are interested in setting up a QDOT or learning more about any of the topics discussed here, reach out to an estate planning attorney experienced with non-citizen planning issues.
Are you a non-U.S. citizen 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.