When both marriage partners are U.S. citizens, they enjoy the right to give each other unlimited amounts tax-free. Want to title the beach house in your spouse’s name? Not a problem. There will be no gift taxes to worry about. But if your spouse is a noncitizen, your gifts to him or her will have to be reported to the IRS if they exceed $148,000.00 in value in a given year. (This amount, called the “annual exclusion,” is adjusted each year for inflation.)
The rule is similar when one spouse dies. Under the “marital deduction,” a U.S. citizen can inherit an unlimited amount from his deceased spouse with no tax liability. But if the surviving spouse is not a U.S. citizen – even if he is a permanent U.S. resident – taxes will be due if the estate exceeds $2 million in value in Maryland or $5.45 million at the federal level.
Couples at this asset level can delay having to pay estate taxes using a qualified domestic trust (QDOT). When the citizen spouse dies, his estate goes into the QDOT, rather than to the surviving spouse. As the only beneficiary, the non-citizen spouse receives distributions of income from the trust for the remainder of his life. No estate taxes will be due on the distributions, although income taxes will be. Then, upon the death of the second spouse, the assets left in trust go to the couple’s children, or to other beneficiaries named in the trust agreement.
QDOTs are an effective way to enable a spouse who is a U.S. citizen to provide for one who isn’t while minimizing estate taxes. The one additional concern in Maryland is that the state doesn’t recognize QDOTs. As a result, if the estate of the citizen spouse exceeds $2 million in value, any assets beyond the $2 million exemption will be subject to the Maryland estate tax, even if a QDOT is established. This tax liability should be taken into account to ensure that the surviving spouse is sufficiently provided for.
If this all sounds complicated, that’s because it is. If you or your spouse is not a U.S. citizen, talk to an estates and trusts attorney with experience in this area. Taking action now may be essential in order to avoid an unexpected tax bill when one of you is gone.
Another option is simply to pursue citizenship for the noncitizen spouse. The first step under this approach is to obtain a green card, which verifies an individual’s status as a lawful permanent resident in the U.S. It also allows the bearer to live and work in the country indefinitely. Green cards are most often granted based on a familial relationship with an American citizen, which now includes same-sex spouses.
After living in the U.S. for a certain number of years, a green card holder may qualify for citizenship status through the naturalization process. The general residency requirement is five years, but for an applicant who has been married to a U.S. citizen during that period, it’s only three years.
Obtaining citizenship won’t eliminate the need for an estate plan, but it can reduce estate taxes dramatically.
Frank Hubbard once quipped that marrying for money is the most difficult way to get rich. He might have gone on to say that if your spouse isn’t a U.S. citizen, then all bets are off.