Estate planning is crucial to protect your loved ones and assets, whether you are a U.S. citizen or retained your original citizenship after marrying an American. Specific legal and tax obligations affect estate planning for non-U.S. citizens, with negative consequences if all conditions are not met. SCC Legal services include estate planning in NJ and our estate planning attorneys are ready to help your family.  

In this article, we discuss U.S. estate and gift tax rules for non-citizens, look into qualified domestic trusts and their requirements, and highlight common estate planning problems for non-American citizens.

Understanding U.S. Estate and Gift Tax Rules for Non-Citizens

Estate and gift taxation on non-U.S. citizens is based on residence. An individual is a U.S. resident if they are domiciled in the United States, which is determined using a facts and circumstances test. It considers multiple factors, including country of citizenship, length of U.S. residence, and statements of intent such as wills. 

If you do not meet the test criteria, you are deemed a non-U.S. resident for estate and gift tax purposes, which affects estate exemption amounts, asset taxation, and marital deductions. Non-U.S. residents are allowed a substantially reduced estate tax exemption amount compared to American residents.

What Is a Qualified Domestic Trust?

How do you protect your estate when your spouse is a non-American citizen? Create a qualified domestic trust (QDOT) with the assistance of an experienced estate planning lawyer from SCC Legal. The trust allows an American citizen spouse to transfer assets to a non-citizen spouse without incurring federal gift and estate taxes at the time of transfer. When the U.S. citizen spouse is deceased, the trust permits the surviving partner to take a marital deduction on estate taxes, which would otherwise not be allowed.

Qualified Domestic Trust Requirements

Strict requirements govern qualified domestic trusts. If the trust fails to meet the conditions at any time after the death of the U.S. citizen spouse, federal estate taxes are imposed as of the date the trust failed to meet the requirements. What are these requirements?

• The trust must be set up under state or U.S. federal law.
• One trustee must be a domestic corporation or individual with U.S. citizenship.
• The qualified domestic trust must follow special rules related to its monetary value.
•  The U.S. trustee must be given the power to withhold estate tax.
• The deceased citizen’s estate personal representative must make an irrevocable election on the estate tax return. 

Common Estate Planning Problems Involving Non-Citizens

A qualified domestic trust does not eliminate estate taxes but defers them until after the death of the surviving spouse. It is thus essential for the surviving non-citizen partner to consult with a legal expert and update their estate plan to avoid common planning problems such as double taxation.  

Countries apply different standards to determine domicile, and a person could ultimately be considered domiciled in more than one country, leading to double taxation of estate taxes. An attorney with experience in estate planning for non-U.S. citizens will take all relevant issues into consideration when the estate plan is drafted. 

For more information on estate planning law in NJ, or if you want to discuss estate planning for non-U.S. citizens, please contact our team at SCC Legal today or visit us at: https://www.scclegal.com/