International Estate Planning 101: A Basic Guide to Estate Planning for Noncitizen Clients

In 1990, nearly twelve million persons living in the United States were not US citizens. The ease of travel and the growth of international investing have led to increases in multinational asset holdings for these persons. The estate planning needs of these aliens will vary depending on their residency status because the IRS has implemented differing tax laws for such persons. Besides the alien's status, the estate planner must also consider both cultural differences and tax treaties. The cultural differences may impact upon how an alien client will view a planning alternative. The United States is currently a party to seventeen transfer tax treaties, which often supercede gift and estate tax rules; thus, the astute planner must consider whether a treaty will apply to a particular client. US citizens are taxed on their entire worldwide estate, wherever those assets are located. Many noncitizens are taxed only on assets located in the United States. Some aliens are considered resident aliens. These are lawful permanent residents, those holding 'green cards'. Resident aliens generally receive the same transfer tax treatment as US citizens and estate planning for such clients will be essentially the same as for citizen clients. Two significant differences exist if the resident alien has a noncitizen spouse. No marital deduction exists for transfers to noncitizen spouses unless the assets are included in a Qualified Domestic Trust (QDOT). Also, assets held in joint tenancy are not treated as owned 50% by each spouse and estate planning for all clients with noncitizen spouses must address these two concerns. Lifetime gifting may be an effective planning tool since gifts to noncitizen spouses of $100,000 per year are specially exempted from gift taxation. Nonresident aliens are those residing in the United States who are not permanent residents. Special rules apply to these aliens for both gift and estate taxation purposes. Under the gift tax rules, gift splitting is not allowed and no unified credit is available. There is no unlimited marital deduction but the $100,000 exemption applies to gifts made to noncitizen spouses. Under the estate tax rules, there is a unified credit of $13,000 and no unlimited marital deduction applies for bequests to a noncitizen spouse unless a QDOT is used. Estate planning for nonresident aliens involves lifetime gifting of intangible property, which is exempt from gift taxation, use of foreign corporations and foreign trusts to hold real property and tangible assets, and use of a QDOT for noncitizen spouses. GST tax also applies, although for gifts in trust, it will only apply to gifts of real or tangible property. Expatriated Americans are those who voluntarily surrender their US citizenship and these clients may require special planning. If they expatriate within ten years of their death, they may not be treated as nonresident aliens and may be taxed on a wider range of assets. These rules also apply to long-term resident aliens and permanent exclusion from the United States may result from disobedience of the tax laws in this area.