How to Plan Your Estate When Married to a Noncitizen Spouse

If your spouse does not possess U.S. citizenship, estate planning becomes somewhat complicated. A unique set of rules applies for noncitizens to inherit property so you should really take the time to sit down with an experienced estate planning attorney to discuss your options. But take comfort in knowing that noncitizen spouses and loved one can inherit your property. So when you draft your will or name beneficiaries for your retirement accounts, you are free to name your noncitizen spouse as a beneficiary.

Here’s the rub – for tax purposes, non-citizens who are permanent U.S. residents are categorized as “resident aliens” and resident aliens are unable to access the unlimited marital deduction privilege that most married couples enjoy, according to . This means that if your resident alien spouse inherits your estate, it could be subject to a huge estate tax bill (depending on the size of the estate).

So what can you do? Well, your noncitizen spouse can inherit your estate without incurring unnecessary taxes through a special trust known as a “qualified domestic trust” (aka QDOT). Basically, you leave your property to the trust itself rather than directly to your spouse. You should set the QDOT up when you’re alive, and set forth that the QDOT comes into existence when you pass on. The trustee should be either a U.S. citizen or U.S. corporation (e.g., a bank or trust company). You then name your spouse as the beneficiary to the QDOT. This would result in your spouse receiving income that the trust property generates and this income is not subject to any estate taxes.

But watch out – if the trust assets are ultimately distributed to your noncitizen spouse, estate taxes will likely have to be paid on the property. Though, your spouse can utilize an exception when distributions have to be made due to an urgent, immediate need and your spouse lacks any other available financial resources.

Another way to allow your noncitizen spouse to receive the bulk of your estate is to gradually reduce your taxable estate by making large gifts to your spouse while you are living. Under current tax law, these gifts are eligible for a larger-than-normal annual exclusion, according to the article. For example, the tax exclusion for these types of gifts is $145,000 per year. This strategy has the dual benefit of allowing you to gradually transfer the majority of your estate assets to your spouse without incurring any federal gift tax along with whittling down your taxable estate down to the point where it qualifies for the federal estate tax exclusion ($5.34 million for 2014).