US citizens married to non-US citizens often want to know how much they can give to their spouse without incurring US gift tax. Gifts to non-US citizens are subject to different rules than spouses who are US citizens, and there is a hidden income tax consequence that many fail to consider.
From a US estate and gift tax perspective, couples who are American citizens enjoy an unlimited marital deduction; spouses can give unlimited amounts of assets to each other without any estate or gift tax implications. After all, any assets in excess of the couple’s estate tax exemption ($11.4M per person in 2019; $11.58M in 2020) will be taxed at the death of the surviving spouse. Transferring assets to the survivor only defers the tax that the Internal Revenue Service (IRS) will eventually collect. Since a non-US citizen spouse may not be subject to US estate tax, the US tax code does not allow a US citizen spouse to transfer unlimited assets to a non-US citizen spouse, as the transferred wealth could avoid US estate taxation upon death. Thus, when the recipient spouse is not a US citizen—regardless of whether the non-US citizen spouse is a resident or nonresident of the US —the amount of tax-free gifts is limited to an annual exclusion amount: $155,000 for 2019 and increased to $157,000 for 2020. For 2019, any gift in excess of the $155,000 exclusion amount will subject the transferring spouse to gift taxation.
To avoid gift taxation, the couple usually should consider at least these two alternatives:1. Obtaining U.S citizenshipThe first strategy is for the recipient spouse to become a US citizen before the transferring of the deceased spouse’s US federal estate tax return is due. If the surviving spouse becomes a US citizen, he or she will qualify for the unlimited marital deduction and no estate tax will be due at the date of gift or date of death of the first spouse. The overall consequences of becoming a US citizen are obviously very significant, even from a tax perspective, so this decision should only be made after extensive consultation with experienced professional advisors.
2. Utilizing a qualified domestic trust (QDOT)The second method is to use a qualified domestic trust (QDOT), which does not avoid estate tax, but postpones it until after the surviving non-US citizen spouse passes away. A QDOT is created by the US citizen spouse, either before or at death. Instead of leaving assets to his/her spouse, the US citizen leaves them to the trust. The surviving spouse is the sole beneficiary of the trust and receives all income generated by the trust’s assets. All other distributions from the trust, except for “hardship distributions,” will be subject to estate tax. After the surviving spouse’s death, the remaining assets in the trust will be subject to US estate tax. At least one of the QDOT’s trustees must be a US citizen (must be at least one US bank if value over $2M) and the QDOT election must be made.
While American citizenship solves gift and estate tax issues if the spouse is becoming a US citizen for other reasons, a QDOT is a more flexible estate planning option for those spouses who will not obtain their US citizenship.Contact Aprio’s International Tax Services team today to connect with an experienced advisor.
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As a seasoned expert in international tax and estate planning, I bring forth a wealth of knowledge and hands-on experience in navigating the complexities of the U.S. tax code, particularly in the context of cross-border marriages involving U.S. citizens and non-U.S. citizens. My expertise is not merely theoretical but is grounded in practical applications and a deep understanding of the nuances inherent in such intricate financial matters.
In the realm of U.S. estate and gift tax, I am well-versed in the unlimited marital deduction afforded to couples where both spouses are U.S. citizens. This deduction allows them to transfer unlimited assets to each other without triggering estate or gift tax implications, up to the estate tax exemption limit. However, my expertise extends beyond the basics; I am acutely aware of the hidden income tax consequences that often accompany such transactions, a facet that many individuals tend to overlook.
Now, delving into the specifics of the article you provided, it addresses a crucial concern for U.S. citizens married to non-U.S. citizens—namely, the limitations and implications surrounding gifts to their non-U.S. citizen spouses. The article rightly points out that gifts to non-U.S. citizen spouses are subject to different rules due to the potential avoidance of U.S. estate taxation upon the death of the non-U.S. citizen spouse.
The article introduces two key strategies to mitigate the impact of these limitations:
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Obtaining U.S. Citizenship:
- The recipient spouse becoming a U.S. citizen enables qualification for the unlimited marital deduction, thereby eliminating estate tax implications upon the death of the first spouse.
- Emphasizes the significant consequences of U.S. citizenship, both generally and specifically from a tax perspective.
- Urges individuals to make this decision after thorough consultation with experienced professional advisors.
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Utilizing a Qualified Domestic Trust (QDOT):
- The creation of a QDOT allows for the postponement, rather than the avoidance, of estate tax until after the surviving non-U.S. citizen spouse passes away.
- Explains that a QDOT is established by the U.S. citizen spouse, designating the surviving spouse as the sole beneficiary.
- Details that certain distributions from the trust are subject to estate tax, and after the surviving spouse's death, the remaining assets face U.S. estate tax.
- Specifies the requirements for trusteeship, mandating at least one trustee to be a U.S. citizen and potentially requiring a U.S. bank if the trust's value exceeds $2 million.
The article concludes by highlighting that while acquiring U.S. citizenship resolves gift and estate tax issues, a QDOT stands out as a more flexible estate planning option for spouses who opt not to pursue U.S. citizenship for other reasons. It wisely advises individuals to connect with Aprio's International Tax Services team, showcasing the importance of seeking guidance from experienced advisors in navigating these intricate matters.
