Current U.S. law does not allow the use of the unlimited marital deduction for an inheritance received by a surviving non-citizen spouse or for lifetime gifts made to such a spouse.

Congress changed the law in 1988, fearing that estate taxes were being "left" to non-citizens by their American spouses and either being taken out of the country or being hidden in other ways so the IRS couldn't get at them. Prior to 1988, non-citizens enjoyed unlimited inheritance levels, no tax at all!!

WHAT THIS MEANS (in English) FOR THE NON-CITIZEN SPOUSE

Without the marital deduction, spouses who aren't U.S. citizens can only receive $675,000 from their spouses free from federal estate and gift taxes. The normal marital deduction (for all U.S. citizens) is $1.3 million. So, as a non-citizen, you lose half of the marital deduction, you can only inherit $675,000 tax free. All monies over $675,000 are taxed at a rate of 55%.

$675,000 may seem like a huge amount of money, but in fact it's not. When doing an estate plan, you consider all assets, including your home (even if you've got a mortgage, you still have some equity in your home), life insurance (this is generally what throws people into the higher tax brackets in estate planning and is often disregarded by those who do not get advise from professionals), personal property, like cars, jewelry, art, whatever, and all savings and retirement plans.

So, for example, if you are married to an American, have some kids, a home, a couple of cars, life insurance, employer sponsored retirement plans (401K, government thrift, etc), individual savings, stocks, other assorted assets and at least one of you is working, the chances of your joint marital assets reaching at least $675,000 are not out of the ordinary. (For those in their early 20's reading this, believe me, you will one day acquire assets and a home, life insurance and all the other trappings of middle-age). If your American spouse works for one of the Fortune 500 companies, there's a pretty good chance they have additional life insurance, paid for by the company as part of their "benefits package". This all becomes part of the "taxable estate" when your spouse dies.

And remember, your home and other retirement assets will continue to increase in value, so even if you're young now and have a huge mortgage on your home, in another 20-30 years, you will likely own that home and have a substantially higher retirement savings nest-egg. And you don't want to share any of it with Uncle Sam!

There are a few tax shelters available to non-U.S. citizens. The Unified Credit and QDT's, Qualified Domestic Trusts. Both these shelters need to be established by qualified lawyers as they require legal knowledge that most lay-persons (such as us) do not have. However, with each of these, there are limitations on how much money you can shelter from U.S. inheritance taxes. There are certain levels of limitations on how much you can shelter also, and these levels change annually. They are also changed by Congress so you really need someone who understands this very complicated section of U.S. Law. As if that's not complicating enough, there are also varying State regulations that can add additional taxes, beyond the federal inheritance taxes. For example, in Virginia there CAN be up to an additional 10% inheritance tax levied on an estate being inherited by a non-citizen.

At this point in time, the only other alternative to avoiding a huge tax penalty is to become an American citizen.

Jennifer Tomkins,
May 2001
Washington