Estate Tax Planning for Married Non-US Citizens Residing in the US

Living in Washington state, you may face two estate taxes when you die: a Washington estate tax and a federal estate tax. If you are married and have a non-US citizen spouse, you may need to consider special estate tax planning as part of your estate plan to reduce these estate taxes.

Washington estate taxes are a concern for couples whose total assets (including life insurance, retirement accounts, real estate, and all other assets) exceed $2.1 million (the Federal estate tax applies to estates greater than $5.5 million). For estates between $2 million and $4 million, proper planning can often eliminate Washington estate tax liability. For estates that exceed $4 million, Washington estate taxes can be reduced and delayed until both spouses have passed away. However, improper planning can cause a surviving spouse to be forced to pay estate taxes on the death of the first spouse. These concerns are increased when one or both spouses are non-US Citizens.

Both the federal estate tax and Washington estate tax have a special provision that allows estates to delay estate taxes until both spouses have died—called the unlimited marital deduction. If both spouses are US citizens, any amounts passing to the surviving spouse receive a deduction from estate taxes. This means that if your entire estate passes to your surviving spouse, your spouse will not have to pay estate taxes. However, this is just a deferral of taxes until your spouse passes away. The purpose of the marital deduction is to allow couples to avoid estate taxes until the survivor passes away.

However, if one spouse is not a US citizen, these special rules do not apply. The reason: if a spouse leaves assets to a non-US citizen spouse, the spouse may leave the US and the assets will forever escape estate taxes. To prevent this, both Washington and the federal government have created strict rules limiting the marital deduction to a non-US citizen spouse. Thus, if you leave your estate to your spouse who is not a US citizen, he or she may be forced to pay estate taxes upon your death. This often-unexpected tax bill can be extremely upsetting for a spouse who has just lost his or her loved one.

Luckily, there is an estate planning tool called a “Qualified Domestic Trust” or QDOT that can be used to avoid this result. A QDOT is a special type of trust that follows strict IRS rules. If the estate of the first to die is transferred to a QDOT instead of given to the surviving spouse, a marital deduction is allowed and taxes are deferred until the death of the survivor. Additionally, the assets in the QDOT can continue to be used for the surviving spouse’s benefit. However, there are strict requirements that must be met for the trust to qualify as a QDOT including naming a US trustee to manage the funds.

If you or your spouse are a non-US citizen and you have an estate that may exceed $4 million, you should speak with your attorney about ensuring your estate plan includes a QDOT.