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Protecting your non-citizen spouse from estate taxes

Many Californians are permanent legal residents from countries around the world or are married to someone who is. In the tax world, these people are referred to by the rather un-politically correct term "resident aliens." This is an important term to know when you are developing your estate plan and have a large estate because the taxation rules for non-citizens are different than for citizens.

As of tax year 2016, if you leave an estate that's valued at more than $5,450,000, the Internal Revenue Service gets 40 percent of the amount over that limit. That's what's known as the "estate tax."

Surviving spouses who are U.S. citizens have an unlimited marital deduction, so are not subject to this tax. However, surviving spouses who aren't citizens are required to pay it, and it can be substantial on a large estate.

With careful estate and tax planning, people can reduce or even eliminate the federal estate taxes for non-citizen spouses and other heirs. Non-citizen spouses get a considerably larger annual exclusion on gifts than others you may choose to give money while you're still alive. By keeping your gifts to your spouse under the current annual amount each year ($149,000 in 2016), you can reduce or eliminate your spouse's tax burden after you die.

If your spouse becomes a citizen prior to the date when the federal tax return needs to be filed for your estate (usually nine months after death), he or she is entitled to the unlimited marital deduction.

Another alternative is what's known as a qualified domestic trust. You would need to designate in your will that a QDOT be formed by your estate's executor or by your spouse. The assets that are bequeathed to your spouse are put into the trust. Taxes on the money are deferred until your spouse withdraws them. However, if your spouse becomes a citizen, he or she can withdraw the money with no tax bill.

When you're preparing your estate plan, it's essential to discuss these issues with your attorney if your spouse is a non-citizen, regardless of your citizenship status. It's not necessary to put off estate planning until your spouse gains citizenship. If his or her citizenship status changes, your attorney can advise you about changes you may want to make to your plan.

Source: MartketWatch, "Estate planning with a non-citizen spouse," Bill Bisichoff, accessed Jan. 30, 2017

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