Married to a Non-Citizen? Watch Out for the Taxes that Bite

Married to a Non-Citizen? Watch Out for the Taxes that Bite

We can almost hear you saying it: what kind of taxes don’t bite?

In this case, it’s a matter of teeth, their sharpness, number and venom. For Americans married to spouses who are not yet citizens, estate and gift taxes can take a healthy chunk out of you. Let’s consider the danger and ways to keep safe. 

Consider the case of a couple, married with children, living in wedlock for 18 years in New York City. Together, they sought consultation from a wealth manager. They discussed their future goals and investment needs, and all was proceeding well. When their adviser mentioned certain nuanced tax issues, though, the couple was taken aback. 

While the husband is a US citizen, his wife is not, creating unexpected tax issues that could affect the course of their estate planning. 

For example, spouses who are both US citizens can give marital assets to each other, or inherit them, tax free. In the case of the couple we’re considering, this cannot be done. Citizens can gift each other an unlimited amount while they’re alive or after one of them passes, without state or federal estate or gift taxes. These easy terms are not available for foreign citizens, despite their marriage to a natural-born American. 

If the couple holds major assets, an unpleasant surprise could be lurking if the US citizen, the husband in this case (who is indeed ten years older than his wife), died first. The foreign spouse would then have to pay estate taxes if the assets exceeded the federal limit, which now stands at $11.4 million. A potentially major bill to pay, all because of a passport. 

Several solutions are at hand. As one example, in the present case, the husband could establish an irrevocable life insurance trust, where the trust itself would be the beneficiary. After his death, his wife would technically be supported by the trust, not the proceeds of the insurance policy. This tactic obviates any worries about estate taxes. 

For more information, please read:
For Noncitizen Spouses, Beware Estate And Gift Taxes | Financial Advisor Magazine


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