With the recent changes to U.S. tax law, you may have heard news stories referring to the marital deduction and other technical tax terms and wondered whether they apply to you. International couples must take special care to evaluate the tax consequences of even simple money transfers due to the marital deduction rules.
What is the marital deduction?
The marital deduction is a special tax deduction that is available only to married couples. It allows them to make unlimited transfers and gifts back and forth between spouses without tax consequences. This includes bequests in a will to a spouse and lifetime gifts. Keep in mind, however, that the second spouse to pass away will give his or her assets to other relatives, and at that time there will be estate tax consequences because no marital deduction applies (assuming he or she does not remarry).
Does the deduction apply to non-U.S. citizens?
Unfortunately, the marital deduction does not apply when the spouse who inherits the other spouse’s estate is not a U.S. citizen. This includes permanent residents as well. The estate given to the non-citizen spouse will not get the benefit of the marital deduction.
However, the U.S. citizen spouse could make lifetime gifts to the non-citizen spouse, but there is an annual exclusion limit of $152,000 as of 2018. Any gifts above that amount cannot be excluded. The U.S. citizen spouse still receives the benefit of the marital deduction for any transfers or gifts the non-citizen spouse makes to the citizen.
If a citizen spouse leaves his or her entire estate to a non-citizen spouse, the surviving spouse will face high tax bills. First, the surviving spouse will not have the benefit of the marital deduction. Second, non-citizen non-residents have a much lower estate and gift tax exemption amount than citizens and permanent residents. The surviving spouse could be stuck paying the extremely high estate tax rate on most of the estate they receive because they have a low exemption amount.
What should international couples do?
To get around the lack of marital deduction, a citizen spouse can make lifetime gifts to or leave his estate to a qualified domestic trust (QDOT) for benefit of the non-citizen spouse. QDOTs must follow special tax rules and requirements. The spouse can then enjoy the gift or the estate without owing such significant taxes.
Searching for legal advice on the marital deduction and 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.