Estate Planning For Green Card Holders (Complete Guide)
December 18, 2022
It should be noted at the start that everyone, regardless of age, finances, or residency status, should make an estate plan to avoid probate in the event of death or incapacity.
However, individuals who are not U.S. citizens, such as non-resident aliens and green card holders, confront an even more difficult estate planning situation when they own U.S. assets.
You've come to the right place if you're a green card holder looking for information on estate planning for non-resident aliens.
If you hold assets in the United States but are not a U.S. citizen or permanent resident alien (with a green card), you do not have the same tax advantages as a regular U.S. citizen, and you may face very different and expensive estate taxes upon death.
The federal estate tax, for example, is a tax levied at death on transferring any assets from the decedent to any individual inheriting.
This estate tax, in particular, is prohibitively costly at 40%. If a person tries to dodge the estate tax by disseminating assets while they are still living, there is a gift tax to consider, which can be as high as 40% if it is triggered.
Regarding gift and estate tax planning, the laws for non-US citizens differ significantly, and if you don't know the requirements, your estate could lose a lot of money due to taxes.
You will understand the following after reading this article:
The special rules that apply to non-citizen spouses
The various estate planning options for wedded non-citizen couples to consider
What happens when a non-citizen green card holder becomes incapacitated
Gift taxes for green card holders
Can Green Card Holders Create Trusts and Wills in the United States?
When a non-citizen has possessions in another country, the law of the nation where the property is located may influence how the property is distributed.
Because a will made in the U.S. may not be lawfully valid in other countries, it may be crucial to have several wills, each dealing with only cash and property in that nation.
Some other governments may recognize it if it meets all of their legal requirements. On the other hand, other countries never recognize a will drafted in another country or recognize it only in limited circumstances.
Furthermore, special care must be taken to ensure that none of the wills unintentionally cancel any previously drafted wills from another country.
Do Any Special Rules Apply to Non-Citizen Spouses?
The unrestricted marital deduction does not apply to non-citizen spouses. Even if the spouse is a permanent resident, a U.S. resident wedded to a non-citizen should be aware that the unlimited marital deduction does not apply to gifts or inheritances to non-residents.
On the other hand, the unlimited marital deduction is unrestricted for transfers from a non-citizen partner to a civil partner.
Some families may consider establishing a qualified domestic trust (QDOT) to avoid the potential estate tax repercussions in such a case.
If a U.S. citizen creates a QDOT, a non-citizen partner can inherit from a U.S. resident spouse without the estate tax.
Can Non-Citizen Spouses Collect Income from a Trust?
A US resident can leave possessions to the trust rather than the non-citizen partner. The spouse is the trust's beneficiary, and the trust can't have any other beneficiaries as long as the non-resident spouse is living.
As the trust's beneficiary, the non-citizen spouse can collect the income generated by the trust property without having to pay estate tax.
The estate tariff on funds or possessions moved to the QDOT will be delayed until the principal has been dispersed.
Nevertheless, if a dispersal is made because the non-resident spouse has a pressing, critical need and no other money is available, the principal can be allocated to them without triggering an estate tax penalty.
Furthermore, if the non-resident spouse becomes a United States resident, the principle can be given to that spouse tax-free.
A QDOT has to be created and the property assigned to it by the time the dead spouse's estate tax return is due. It is usually established while both partners are still living and take effect after the resident spouse passes away.
Is Property Owned Jointly Regarded Differently for Green Card Holders?
When a married couple owns a house together, both spouses own it equally if both are United States residents. This indicates that each person possesses 50% of the house.
However, this presumption may not necessarily apply if one of the partners is not a citizen.
For instance, if the U.S. resident spouse passes away sooner and the jointly-owned house is worth $200,000, the whole $200,000—rather than $100,000—will be incorporated in that spouse's taxable inheritance unless the non-resident spouse establishes they paid a particular amount toward the home's acquisition.
Thus, if the non-resident spouse contributed $50,000 in mortgage expenses, the amount included in the estate of the U.S. citizen spouse would be just $150,000.
If a married couple purchases property jointly and the partner who is a U.S. resident pays the full purchase price, the non-citizen spouse will get 50% of the property's worth as a gift.
Is Gifting Unlimited for Green Card Holders and Their Spouses?
Many couples take for granted the ability of spouses to make gifts to each other and buy property together. However, gifting can be difficult if one of the spouses is not a U.S. resident.
The gift tax applies to money, jewelry, and other commonly exchanged gifts. It also applies to joint property purchases.
If a couple purchases a home together and the U.S.-citizen spouse pays the total purchase expense, half of the value is deemed a gift.
Assume Shawn and Kendra paid $320,000 for their home and that Shawn’s savings covered the entire cost. Shawn gave Kendra $161,000 for the house in the eyes of the law, even though they owned it jointly, and he paid for it entirely.
What Happens if a Non-U.S. Citizen Becomes Incapacitated?
Loved ones cannot automatically intervene on behalf of non-U.S. citizens who become temporarily or permanently handicapped. If a conservatorship process must be held in court, it is not only costly, public, and time-consuming, but it may also be complicated due to foreign citizenship.
Green card holders can appoint individuals to act on their behalf in the event of incapacity by using a Health Care Proxy, Authorization for the Release of Protected Health Information, and Durable General Power of Attorney.
Furthermore, a green card holder may express in these documents their desire to be transported back to their home country for reasons of health insurance coverage or family location in the event of a prolonged infirmity.
Can a Green Card Holder Get Tax Relief from a Treaty?
Australia, Austria, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, Norway, South Africa, Sweden, Switzerland, and the United Kingdom have all signed estate or gift tax treaties with the United States.
In principle, these agreements allow a person of one of the treaty countries who owns property to avoid having both governments tax the same asset at the time of death.
In terms of the United States estate tax, a treaty could lower or eliminate the tax on a non-resident alien's United States property.
Can a Green Card Holder Exit the Country to Avoid U.S. Taxation?
A non-US citizen client may intend to leave the U.S. in the future in order to avoid U.S. taxation.
If you have been a green card holder for 8 of the last 15 years, have more than $2.0 million in assets, and have reported an annual income tax liability in excess of $145,000 for the previous five years, you may be subject to a demanding exit tax.
Are There Any Other Planning Options for Wedded Non-Citizen Couples to Consider?
What should you do to reduce your estate and gift tax burden if you keep these unique tax laws in mind for wedded non-citizen couples?
Make a Strategy to Gift Over Time
One possibility is to begin transferring investments to your partner throughout your lifetime. If your partner is a resident, the unlimited marital deduction comes into play in a life-or-death situation.
However, suppose your partner is not a resident. In that case, you can use the yearly exemption amounts to transfer funds to your spouse, who can then utilize those yearly gifts to acquire a life insurance policy in the amount of the approximate estate tax that would be required.
Furthermore, a person living outside of the United States who is considering becoming a U.S. resident or getting citizenship should preferably think about donating U.S. intangible investments and non-US investments to family members because the gift tax does not apply; however, if the person becomes a citizen for income and transfer tax reasons, they are taxed on all of their global assets.
To Hold Real Estate Assets, Utilize Irrevocable Trusts or Foreign Blockers
Non-United States residents can give and accept an infinite amount of intangible personal property, according to Treasury Regulation Sections 20.2104 and 20.2105.
There are no gift taxes on interests in LLCs and corporate shares, except for US-based real estate, cash, artwork, and jewelry.
Thus, it appears that, in terms of intangible personal property, you can basically dodge the full transfer tax rule by owning property in LLCs and corporations and gifting it to an irrevocable trust or a foreign corporation/partnership to bypass the negative income, gift, and estate tariffs mentioned above for non-residents.
Despite the fact that the rules can be complicated, many non-citizens use these companies to hold property.
Make Use of an ILIT
Life insurance can be utilized to settle estate taxes. However, while life insurance may be income tax exempt, it isn't estate tax exempt unless owned through an irrevocable life insurance trust (ILIT) or equivalent vehicle.
For instance, if James has a $1 million estate but only a $70,000 exemption, he can buy a $500,000 life insurance policy to pay the tax when he dies.
However, after purchasing the life insurance, Jeff might have had an additional $500,000 in his estate (now worth well over $1 million), in which circumstance the estate tax has also grown, surpassing the death payout.
ILITs settle this issue by owning the life insurance policy so that the death benefit does not become part of Jeff's estate upon his death.
How Can Trustworthy Help?
Estate planning for non-citizens is quite complicated and requires collaboration from several parties.
If you are a non-citizen or are married to a non-citizen, you need to consider all the road bumps that may affect your future planning.
Trustworthy lets you and your family collaborate on estate planning documents in one safe space. This is especially important if your documents are scattered across several countries.
Start your free 14-day trial today to collaboratively make sure your future is planned for and that your estate and gift tax burden is reduced.