Estate Planning for Foreign Nationals

Foreign Nationals Must Plan, Even for Small Estates

We have found many foreign nationals unprepared for the consequences of their failure to do property estate planning for their United States assets.  This is in relation to their assumption that their estate plan documentation in their home country will be valid in Florida, as well as the lack of estate tax planning.

Documentation

The estate planning documents that may be created and legally effective in a foreign country are not necessarily valid to pass title to U.S. assets, even if that document is valid and accepted by a court in that country. For example, if a nonresident of Florida executes a will that is valid under the laws of the state or country where executed, Florida will generally recognize that will.  But, there are two types of wills that are never valid in Florida: holographic wills and oral wills. A holographic will is a document that is only signed by the decedent, with no witnesses or notaries. It is strongly advised that we review any estate planning documents you have already executed to determine if they will be effective in Florida. You may need to execute new documentation to carry out your specific wishes regarding your U.S. assets.

Estate Tax Planning

For United States citizens, there is an unlimited marital deduction, meaning that there are no U.S. estate taxes charged at the death of the first spouse. For this reason, many believe that there is no need for advanced estate planning unless clients have larger estates. However, the unlimited marital deduction only applies to U.S. Citizens, meaning that if one or both spouses are foreign nationals, the unlimited marital deduction does not apply, and special planning is required.

Those who have purchased properties in the U.S. suddenly find themselves facing U.S. estate tax, and their surviving families are surprised to find out that this estate tax could take an almost 40% giant bite off the fair market value of the estate of their deceased family member. It makes people regret buying property when compared with the favorable income tax treatment, or at least the equal “national treatment”, enjoyed when they were “enticed and lured” into buying the U.S. properties or stocks.

For U.S. Citizens or Resident Aliens in 2017, the lifetime gift and estate exemption is $5.49 million, and all worldwide assets are included for the valuation of your estate. For Non-Resident Aliens, there is no lifetime gift exemption. In addition, the lifetime estate tax exemption is approximately $60,000, and all U.S. held assets are subject estate taxes in the amount of up to 40% of the gross value, with the exemption of death benefits of a U.S. life insurance policy, U.S. Bank deposits, and U.S. government bonds and treasury notes.

In many cases, a Qualified Domestic Trust (QDOT) is used to provide a deferral of estate taxes for the life of the surviving spouse, but the assets inside of the QDOT will be subject to estate taxes when distributed to meet any hardship needs of the surviving spouse. Moreover, when the surviving spouse passes away, the assets and appreciation in the QDOT will be subject to estate taxes. Generally, a QDOT is a fairly complicated trust, requiring a U.S. Trustee, with a fairly limited benefit.

While there is no marital deduction for gifting assets to a non-citizen spouse, you may make annual gifts up to $147,000, indexed for inflation, to your spouse. This is typically best taken advantage of by setting up an irrevocable life insurance trust, and purchasing a life insurance policy, which would cover any future U.S. Estate Taxes. This is typically seen as a more efficient estate planning option than a QDOT, as the life insurance death benefit is not subject to income or estate taxes, and can be used to pay any estate tax liability, instead of deferring it.

Proper estate planning for non-citizens is a complicated, but critical process. With proper planning in place, you can avoid a huge estate tax liability, and ensure that your assets pass on to your heirs as you intend them to.