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Estate Planning Considerations for Non-U.S. Citizens

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There are many reasons why people do estate planning. The most common reason is to avoid probate and to make sure your assets go to your loved ones after you die, instead of being seized by the courts.

But there is another reason why some people must do estate plans and it has to do with something called the “estate tax.” Generally speaking, the estate tax is a tax imposed on the transfer of any and all assets following a death. The tax is high, starting at 40%.

There are many exceptions to the estate tax rule. First, if you and your spouse are U.S. citizens, and if one of you dies, the surviving spouse can inherit an unlimited amount without ever having to pay the estate tax (keep in mind, there can still be a probate though). Secondly, if both spouses pass away, they can currently leave up to $10.9 million to their children without their children having to pay a 40% tax..

One example of where the estate tax can be an issue even for a U.S. citizen is when they are looking to buy life insurance. The life insurance death value is counted towards the individual’s estate. So, if a person wants to buy a $2 million policy but that $2 million will put them over the $10.9 million threshold, there will be a 40% tax due upon death. To avoid this, we can have the client purchase the policy under an irrevocable life insurance trust (ILIT).

However, if you are not a U.S. citizen, the estate and gift tax rules are very different. For example, if you are a non-resident(*), you can only pass $60,000 after you die. Everything beyond $60,000 is taxed at 40%. So if you own a home, there will be a 40% tax due on the value of the home above $60,000 – which is almost every home.

In these cases, it is important for non-U.S. citizens to speak to an estate planning attorney to ensure that not only will probate be avoided, but that the estate tax can be reduced or eliminated. Some common strategies are transferring certain assets, like a home, to a trust, using intermediaries like LLCs or partnerships. Another common strategy is for the client to purchase additional life insurance policies to pay for the estate tax exposure.

It is important that the attorney and the life insurance agent work together to coordinate the approach to this sort of planning.

(*) – Recall that a non-resident is defined differently for transfer tax purposes than for immigration or income tax purposes, and does not necessarily mean a green-card holder.

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