Washington, DC residents may already know that when two American citizens are married, each spouse can gift as much in cash and other assets to the other as he or she would like, both in life and in death. This is due, at least in part, to the unlimited marital deduction provided under federal law. However, more complex estate planning is required to gift or will assets from an American citizen to a resident alien spouse.
This is because limitations are placed on the amount that can be gifted to a spouse that is not a United States citizen. Further, any monies or assets over the estate tax exemption limit ($5.34 million for 2014) are taxable, since the remaining portion of a deceased spouse's exemption is not transferable to a resident alien as it would be to an American citizen. If the resident alien spouse can become an American citizen, the unlimited marital deduction would apply. However, until and unless that happens, a limit of $145,000 (for 2014) can be gifted each year, but this could still be a useful way to transfer assets to over time. Trusts may also be used in an attempt to reduce or eliminate the estate tax burden.
One trust option is the qualified domestic trust (QDOT). The taxes on assets in the trust are deferred until money is taken out of the trust or the surviving spouse passes away. At that time, the assets go back into the first spouse's estate. This trust may also give the surviving spouse the opportunity to become an American citizen, even if the first spouse dies.
At first glance, it may seem as though no way exists for a resident alien spouse to avoid paying estate taxes. Several of the benefits available to Washington, DC couples where both spouses are American citizens just are not available when one spouse is a non-citizen. Fortunately, through estate planning, an American citizen can still provide for his or her non-citizen spouse in the event of death without exposing the surviving spouse to estate taxes.
Source: MarketWatch, Estate planning with a non-citizen spouse, Bill Bischoff, Feb. 19, 2014