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Does the unlimited marital deduction apply to non-citizens?

Like many people in Detroit and across the country, you might have married someone who is not a United States citizen. Understandably, you would want to make sure your spouse is taken care of if you are the one to pass away first. How does estate planning apply to non-citizens?

According to MarketWatch, you have every right to leave your estate to a spouse who is not an American citizen. However, things become more complicated if you have a sizable estate. Generally, you would able to transfer all of your assets to your surviving spouse if he or she is an American citizen, without being subject to the federal gift and estate tax. This is known as the unlimited marital deduction. However, non-citizens are not eligible for the deduction. The remainder of your estate after the estate tax exemption ($5.45 million per person in 2016) would be subject to the estate tax for your non-citizen spouse. This can be a significant amount going to the government that you would wish for your spouse to keep.

Is there a way to get around the estate tax in this situation? Your spouse may avoid the problem by becoming a naturalized citizen before the deadline to file the federal tax return. This may take several months, so it might work only if your spouse has already begun the naturalization process in advance of your death. You may decide to whittle down the inheritance your spouse receives so it is under the estate tax limit, while still leaving him or her a sizable amount, by dividing your estate among your children and grandchildren. You could do this either by giving cash gifts to your loved ones while you are alive, or upon your death.

You might also consider creating a qualified domestic trust. With this trust, your spouse could live off of the income that the trust generates. The estate tax is deferred until your spouse either takes money out of it (usually in an emergency situation) or passes away.

You have many options that may assist you in leaving an inheritance to a non-citizen spouse without being hit by the federal estate tax. However, this information should not replace the advice of a lawyer.

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