Foreign National Estate Tax Planning

The unlimited marital deduction for the transfer of assets between spouses does not apply to gifts made to non-U.S. citizen spouses, hence, it’s important to create a proactive plan with trusts. The unlimited marital deduction is not available in this case, which means if the spouse is a non-U.S citizen tax-free gifts are limited to the annual exclusion amount of $175,000 and lifetime exemption of $12.92M for 2023, amounts over the exemption will have a federal estate tax of 40% applied. This tax must be paid within nine months.

To extend taxation at death, one trust planning solution is a qualified domestic trust (QDOT). This trust allows a surviving noncitizen spouse to take a marital deduction on the assets within the trust, which defers taxation until the death of the noncitizen spouse.

Another solution is an irrevocable life insurance trust (ILIT), which can be used to pay estate taxes at death. The death benefit proceeds are generally income and estate-tax-free, but ownership by an individual could still be subject to federal estate taxes. To avoid this, an irrevocable trust such as an ILIT is used to hold the proceeds.

Note that tax law is complex and each individual’s circumstances are unique, so it’s important to consult with your own tax and/or legal advisor for guidance. The information provided here is for educational purposes only and should not be relied upon as a substitute for professional advice.