We’re pleased to provide you with insights like these from Boston Private. Boston Private is now an SVB company. Together we’re well positioned to offer you the service, understanding, guidance and solutions to help you discover opportunities and build wealth – now and in the future.
Non-citizens, even resident green card holders who are married to U.S. citizens, are treated differently for estate and gift tax purposes than their spouse. Because this adds another layer of complexity to the estate planning process, partnering with a team of trusted advisors is crucial. Without proper planning, non-citizens may be subject to unexpected and substantial tax liabilities.
Estate planning that maximizes gifts and minimizes tax exposure
When contemplating the estate planning process, most clients focus primarily on who to leave their assets to and who best to name as a fiduciary. However, they may not give as much thought to income, estate and gift tax regulations that are the backbone of a well-crafted estate plan. When one or both clients are not U.S. citizens, their status may have a major impact on the estate and gift tax picture.
Typically clients are interested in giving as much money to their loved ones as possible while minimizing transfer tax exposure. For estate and gift tax purposes, many rely on the marital deduction. This allows a spouse to give unlimited assets to their spouse during their lifetime without triggering a gift tax as well as leave unlimited assets to their spouse at the time of their death without owing estate tax (at the first death). Notably, the marital deduction allows an individual to make a transfer to their spouse during their lifetime or upon their death without utilizing any of their estate and gift tax exemptions.
However, unlike the estate and gift tax exemption, which both citizens and green card holders can use to make transfers, the marital deduction only applies to U.S. citizens. If you are a citizen married to a green card holder, you may not rely on the marital deduction and are limited to what can be given to your spouse tax free, during your lifetime and upon your death. Consulting with your team of advisors regarding asset transfers to a non-citizen spouse is crucial and engaging a team that is well versed in planning for non-citizens even more so.
Understanding the tax consequences of assets held outside the U.S.
When engaging in the planning process, it is also important to take an inventory of assets you and your spouse have and identify where they are and how they might be taxed. Assessing how assets in the U.S. are taxed is generally easy to do but less so for assets outside the U.S. There may be transfer taxes associated with assets held outside the U.S., potentially exposing your estate to liabilities in two countries, though the U.S. does have tax treaties with several countries to ensure assets are taxed where appropriate and not taxed twice. Determining how foreign assets are transferred may also require a set of planning documents in the country where the assets are housed. Engaging counsel in that country may be an important part of the planning equation as well.
Considering the tax benefits of U.S. citizenship
If you or your spouse is currently a green card holder and you intend to remain in the U.S. for the long term, consider pursuing citizenship. Becoming a citizen can make you eligible for tax benefits such as the marital deduction, allowing you to incorporate the deduction into your estate planning strategies and avoid incurring gift taxes when transferring assets to one another.
If you don't intend to become a citizen or are in the midst of the process but are not yet a citizen, it is worth considering that your estate planning documents contain language allowing you to leave assets in trust for the benefit of your non-citizen spouse during their lifetime without a transfer tax consequence. This language is called qualified domestic trust ("QDOT") provisions. Working with professionals who are well versed in this kind of language will help in the planning process.
Protecting your wealth with a team of experts
If you or your spouse is a green card holder, you are considered a resident for income tax purposes and are required to file a tax return on all income, not just income derived from assets in the U.S. Thus, regular consultations with your advisors regarding adequate and appropriate reporting may be helpful in the planning process.
Any time there's an element of international tax exposure, you may want to consider assembling a team of advisors to build your estate and tax plan. Once you've found your trusted advisors, transparency about your assets, income and the residency status of you and your family may help in the planning process. Your advisors strive to protect your wealth. If they don't have the full picture of your finances, they may not be able to provide an optimal strategy. By assembling a team of experts and giving team members the full picture of your finances, you can create a plan that supports your loved ones for generations.
The value of partnering with a well-rounded team of trusted advisors
Whether you've already decided to pursue U.S. citizenship or you're still unsure of the best path forward for you and your family, your advisor can offer expert guidance. They can help you understand your tax position across different scenarios and provide helpful insight and support to make the best possible plan for your wealth and legacy.
At SVB Private, we encourage our clients with financial interests in more than one country consider assembling advisory teams in both regions. Although this may seem more complex and costly than relying on one team to handle your financial concerns, well-rounded teams can help you avoid tax issues and non-compliance with both countries' laws.
Some may have advisors in their home country or in the U.S. with whom they've worked for years. Although those advisors may continue to be trusted members of your team, it's beneficial to have a council of experts developing your optimal tax strategy. Partnering with advisors who understand the unique complexities of your wealth planning needs, the tax laws in the U.S. and your home country, as well as any treaties that may exist between them, is foundational to growing and protecting your wealth. Our in-house advisors are accustomed to collaborating with external advisors to develop the best plan possible for clients.