Married noncitizens may face huge estate taxes

Married couples in the United States can face special complications when at least one spouse is a noncitizen. When they are a high-asset couple and one spouse passes away, the U.S. tax system may offer even more unpleasant surprises.

When the American spouse dies, taxes can take brutal chunks taken out of their spouse’s inheritance. The good news is that careful planning can often make taxes a less troubling issue.

Marriage exception does not apply to noncitizen spouses

Generally, married people in the U.S. enjoy the “unlimited marital deduction.”

It allows one spouse to give the other as much money as they want, and neither must pay a tax on the transfer. They can even do this through their estate plan, with the money transferred upon death. In effect, the deduction treats married couples as if they are one person.

This is not so if one spouse is a noncitizen or so-called “resident alien.” The maximum amount someone married to a noncitizen can give them tax-free in any given year is $157,000 (as of 2020, since the government adjusts the exact number from year to year). Above that number, the government takes a huge cut.

As part of an estate inherited after death, the first $11.58 million is tax-free. A noncitizen spouse must pay a large inheritance tax on anything above that amount.

Solutions to consider

There are secrets to avoiding these huge tax bills, and they rely on acting as soon as possible and understanding the options.

Described simply, the typical options involve:

• The noncitizen becomes a citizen.
• The estate transfers to the non-citizen slowly before the citizen dies.
• A Qualified Domestic Trust (QDOT) tales on the estate and the noncitizen spouse takes advantage of its assets.

These are complex and unforgiving areas of the tax code, but with enough time, planning and well-qualified help, most families facing these issues can find solutions that work for them.