Q: What special Estate Planning concerns need to be addressed when working with Resident Aliens, Nonresident Aliens, and a Noncitizen Spouse? - Margot Ramos, Bayonne, NJ.

A: This question is becoming increasingly important. In the past, only producers who worked in "port cities" ran into this situation. However, with the new global village it is possible that the nice couple, with no discernible accent, sitting across from a producer in Ames, Iowa has assets in more than one country and one at least one of the individuals is a noncitizen.

To begin the discussion it is important to have a clear understanding of the definitions. Citizenship is clear-cut and is defined under Immigration and Nationality Act 8 USC Sec. 1101. A resident alien is a noncitizen whose domicile (defined later in this article) is the United States of America. The estate tax rates for resident aliens and US citizens are the same, however the deductions and credits are different.

A nonresident alien is a noncitizen whose domicile is not in the United States of America. The estate of a nonresident alien is taxed solely on the transfer of assets situated, or deemed situated in this country. A nonresident alien must be both a "nonresident" and a "noncitizen."

For estate tax purposes the term "domicile" is the controlling factor, not "residence." The term "nonresident" means a decedent who, at the time of death, maintained a domicile outside the United States. (US Treasury Reg. Sec. 20.0-1-(B)(2)) An interesting note is that residents of Puerto Rico and the US Virgin Islands are considered nonresidents.

Domicile is defined as the place an individual has chosen as the base of domestic and legal relations, the principal and permanent residence, with no present intent of leaving. Residence without intent to remain indefinitely does not constitute domicile. A domicile, once acquired, is presumed to continue until it is shown to have been changed.

The unified credit for resident aliens is the same as for US citizens, currently $ 192,800. Nonresident aliens have a small menu of unified credits. In general, the unified credit for a nonresident alien is $13,000. If the person is a resident of a US possession (a nonresident for estate tax purposes) the unified credit is the greater of $13,000 or that proportion of $46,800 which the value of the decedent's gross US estate bears to the entire gross estate regardless of where it is situated. In addition, 17 countries have tax treaties with the US (Australia, Austria, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Japan, Netherlands, Norway, Sweden, Union of South Africa, United Kingdom) which give individuals domiciled in those countries the ratio of US to Total assets as a ratio of the $192,800 credit.

A noncitizen surviving spouse who is a resident is entitled to the full unified credit of $192,800.

The unlimited marital deduction is an important planning tool for US citizens. This allows a decedent to pass some or all of the decedent's assets to the surviving spouse without incurring taxation on the assets. A noncitizen surviving spouse does not enjoy the use of the unlimited marital deduction. Apparently, Congress was attempting to insure that aliens would not reposition assets to their country of origin thereby removing the assets from the reach of the Internal Revenue Service.

There are some exceptions to the rule disallowing the marital deduction. Property that passes to the surviving spouse in a qualified domestic trust (QDOT) will qualify for the unlimited marital deduction. Another exception occurs if the surviving spouse becomes a US citizen before the estate tax return is filed and was a US resident for the entire period between the death of the decedent and becoming a US citizen.

The qualified domestic trust (QDOT)must met specific criteria. The trust must be created under US law or, if a foreign trust, must specify that the laws of a particular state apply. The trust instrument must require that at least one of the trustees be a US citizen or a domestic corporation. This trustee must have the right to withhold the amount of any QDOT tax imposed. The executor must make an election by attaching an election statement to the estate tax return, and once made this election is irrevocable.

QDOT's are divided into 2 categories. Those with assets exceeding $2,000,000, valued on the date of death, must either have a bank, as defined in IRC Sec. 581, as one of the United States Trustees, or must post a bond equal to 65% of the value of the QDOT. If the QDOT is less than $2,000,000 it must either meet one of the prior requirements or have no more than 35% of the trust assets located outside the US.

Any distributions from a QDOT, other than income or for a "hardship," made prior to the surviving spouse's death are subject to estate tax. This tax is calculated as if the asset had been included in the decedent's estate, not the survivor's estate.

Gifting between spouses is another approach that is often used in Estate Planning to create the most advantageous asset ownership. Typically gifts between spouses are not limited under the unlimited marital deduction. This is not true for alien spouses. Currently, gifts to alien spouses have a $100,000 annual exclusion. In addition, to qualify under the exclusion the gift must be a gift of present interest.

Personally owned life insurance often creates unintended estate tax consequences. However, this is one area where a nonresident alien may actually have an advantage in the estate tax arena. Amounts receivable as insurance proceeds on the life of a nonresident alien are not considered to be property within the US and therefore are not subject to estate tax. Because of this, a nonresident alien can easily use personally owned life insurance to offset any estate tax liability without increasing the size of the tax already imposed.

Resident aliens do not enjoy the same benefit. Any life insurance contract in which a resident alien possessed any incident of ownership within three years of death will be included in the gross estate.

The Generation Skipping Transfer Tax is another issue that is important in estate planning. Citizen and noncitizen alike, regardless of domicile, are allowed a $1,000,000 lifetime exemption from the GST tax. The nonresident alien only subjects that portion of the estate that would otherwise be subject to US estate tax to the GST tax. Property outside of US jurisdiction can pass directly to a grandchild without imposition of the GST tax. For this reason, nonresident aliens wishing to pass assets to grandchildren should take great care in assuring assets are never subject to US jurisdiction.

Because of the somewhat confiscatory nature of the present estate tax system some US citizens have given up their citizenship in exchange for citizenship in a more tax friendly jurisdiction. This extreme choice is not without its risks. IRC Section 2107 states that certain property will be subject to US estate tax for a 10 year period if an individual gives up US citizenship for the purpose of avoiding US estate taxes. Resident aliens are subject to the same 10 year time frame if they terminate US residency, after residing in the US for at least 8 of the last 15 tax years, if the purpose was to avoid US estate taxes. In fact, the US government has gone so far as to presume the purpose is tax avoidance for high income or high net worth individuals.

As you can see, when working with noncitizens it is very important to establish in which category the client falls. A thorough knowledge of the applicable tax laws can save your clients vast amounts of money. And finally, keep in mind that if you don't ask they might not tell - so make sure you ask.