If your spouse isn’t a United States citizen, some special legal rules may affect your estate planning. But for the most part, you can proceed just as if your spouse were a citizen.
When it comes to the basic estate planning steps that just about everyone should take, it doesn’t matter whether or not you or your spouse are citizens. Both of you should:
One threshold question you may have is simply whether you can leave property to someone who isn’t a U.S. citizen. The answer is yes; noncitizens can inherit property just as citizens can. So when you make your will or living trust, or name beneficiaries for your retirement accounts or life insurance policies, there is no problem with naming your noncitizen spouse.
Most people don’t need to worry about the federal gift and estate tax, which affects only very wealthy families. For deaths in 2020, only those who leave more than $11.58 million are potentially subject to the tax. Married couples can leave a total of twice that amount tax-free.
How it works. The tax is imposed on transfers of property both during life and at death. The tax rate is the same in both circumstances. Because the exemption amount is so high, very few families pay the tax. It isn’t collected until after someone’s death, when the value of all property that person gave away or left is totaled up.
Assets left to a surviving spouse are not subject to federal estate tax, no matter how much they are worth—IF the surviving spouse is a U.S. citizen. This rule is called the unlimited marital deduction. It is in addition to the individual exemption that everyone gets.
The marital deduction, however, does not apply when the spouse who inherits isn’t a U.S. citizen, even if the spouse is a permanent U.S. resident. The federal government doesn’t want someone who isn’t a citizen to inherit a large amount of money, pay no estate tax, and then leave the country to return to his or her native land.
Still, keep in mind you can leave assets worth up to the exempt amount (again, $11.58 million in 2020) to anyone, including your noncitizen spouse, without owing any federal estate tax. And if the noncitizen spouse dies first, assets left to the spouse who is a U.S. citizen do qualify for the unlimited marital deduction.
If your spouse is a citizen, any gifts you give to him or her during your life are free of federal gift tax. If your spouse is not a U.S. citizen, however, the special tax-free treatment for spouses is limited to $157,000 a year (in 2020). This amount is indexed for inflation. That’s in addition to the amount you can give away or leave to any recipient without owing federal gift/estate tax.
If you have so much money that you are worried about estate tax, there are two main strategies to consider.
If your spouse becomes a U.S. citizen by the time your estate’s federal estate tax return is due, he or she will qualify for the unlimited marital deduction. The return is generally due nine months after death, but the IRS may grant a six-month extension. Because it takes a long time to get citizenship—for most people, there is a waiting period before you can apply, and it takes at least several months after you apply—this isn’t an option for most people.
Your noncitizen spouse can inherit from you free of estate tax if you use a special trust, called a "qualified domestic trust" or QDOT. (Internal Revenue Code section 2056A.) You leave property to the trust, instead of directly to your spouse. Your spouse is the beneficiary of the trust; there can’t be any other beneficiaries while your spouse is alive. Your spouse receives income that the trust property generates; these amounts are not subject to estate tax.
If trust assets themselves (principal) are distributed to your spouse, however, the estate tax will probably have to be paid on that property. (There’s an exception when distributions are made because the spouse has an urgent, immediate need and no other resources.)
A QDOT must be established, and the property must be transferred to it, by the time the estate tax return of the deceased spouse is due. Usually, it’s set up while both spouses are alive, and comes into existence when the citizen spouse dies. The trustee—that is, the person or entity in charge of trust assets—must be a U.S. citizen or a U.S. corporation such as a bank or trust company.
If you are interested in a QDOT, read "QDOTs for Noncitizen Spouses" and talk to an experienced estate planning lawyer. To accomplish its purpose, the trust must comply with some complicated legal rules.