Certain assets located in the United States (including real property) held at death by non-resident and resident aliens are taxed by the United States at rates from 18% to 45%. Non-resident aliens are allowed a credit against the tax equal to $13,000, while resident aliens (and citizens) are currently allowed a credit against the tax of $780,800. These credits, sometimes referred to as the "unified credit" or "applicable credit amount", are dollar for dollar offsets to the estate tax and are tantamount to $60,000 of US assets passing tax free for non-residents and $2,000,000 of US assets passing tax free for resident aliens.
In addition, like US citizens, non-resident and resident aliens are entitled to an unlimited marital deduction against the estate tax if, they are survived by a spouse who is a citizen of the United States. Thus if one leaves their citizen spouse everything they own, over and above the applicable credit amount, there will be no estate tax at their death. If survived by a spouse who is not a citizen of the United States a decedent's estate is not entitled to the marital deduction unless the decedent's assets pass to his or her spouse through a Qualifying Domestic Trust (QDOT). Utilizing a QDOT can defer all estate taxes at the death of the first spouse until the death of the surviving spouse. A QDOT must have a US trustee and meet other requirements. If the QDOT holds over $2,000,000 the requirements are even more stringent. Distributions of principal from a QDOT are taxed as though they were part of the decedent's taxable estate.
A properly drafted Revocable Living Trust (RLT) containing QDOT provisions will defer estate taxes and avoid probate at the death of either spouse. The probate process takes time (at least six months) and can be expensive. Single non-resident aliens and resident aliens who own US property can also avoid the complexities of probate with an RLT.
Simple wills can be used by non-resident aliens to distribute their U.S. property to whom they want at their death. Wills have to be probated to be effective. Although using a joint tenancy or a tenancy by the entirety will avoid probate at the death of the spouse to die first, probate will be necessary at the surviving spouse's death and without a valid will or trust the survivors property may not pass to whom one wishes to have the property. If a married couple is using only wills a QDOT can be implemented at the death of the first spouse to die as long as it is in effect within nine months of death (fifteen months if the estate tax return is properly extended). The time requirements for creating a valid QDOT are strictly enforced.
Our firm can help select, and may serve, as successor trustee of an RLT containing a QDOT. In most cases trustee fees will not be incurred until death and the QDOT becomes operational.
The US Estate Tax applicable to non-resident and resident aliens is further complicated by estate tax treaties which, in some instances, lessen the US estate tax. For instance, the US/UK estate tax treaty provides that a non-resident alien who is domiciled in the UK may elect to be taxed on his/her worldwide assets and utilize the resident alien (or citizen) unified credit amount.
Non-resident aliens who are German citizens may take advantage of the U.S./German Estate Tax Treaty and get substantial relief from the U.S. Estate Tax. This relief may include both a marital exclusion equal to the amount by which the property passing to the surviving spouse exceeds 50% of the otherwise taxable estate, a marital deduction equal to the lesser of the value of the property passing to the surviving spouse or the applicable exclusion amount for citizens or resident aliens, as well as other significant tax reduction benefits.
Hendry, Stoner, Calandrino & Brown, P.A., serves clients from around the world. We are conveniently located in Orlando, Florida, and serve communities throughout central Florida, including Sanford, Lakeland, Daytona, Apopka, Clermont, Cocoa and Ocala, as well as Orange County, Lake County, Polk County, Seminole County, Volusia County, Brevard County, Marion County, and Osceola County. If you live near Kissimmee, Altamonte Springs, Winter Park, Lakeland, Winter Haven, or Davenport, please contact us to make an appointment at our office. For clients outside of Central FL, we can arrange a teleconference meeting.
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