If You’re Not a U.S. Citizen, Make Sure You Know These Financial Planning Facts

While immigration reform is a hot topic, the U.S. also continues to attract all types of legal international residents. In my financial planning work, I work with Foreign Nationals facing challenges with assets, investments or other ties to the United States.

“Foreign National” is a broad term that includes (from the perspective of the U.S.) both Resident Aliens (non-U.S. citizens who have established a legal domicile in the U.S. and have no intent to leave) and Non-Resident Aliens (non-U.S. citizens who have not established domicile in the U.S.).

As the global economy expands, so does the need for International Estate Planning. Estate Planning can be a relatively complex process in any situation, but the process becomes even more complex when it involves a noncitizen. Transfer taxes can be an especially complex area.

A transfer tax could be looked at as a type of income tax. The U.S. taxes the passing of title to property such as real estate, investments, shares, or bonds, from one person (or entity) to another. In a narrow legal sense, a transfer tax is essentially a transaction fee.

Here are a few facts Foreign National should keep in mind when considering transferring assets or properties to a U.S. Citizen or entity.

Resident Aliens Have Special Considerations

If a noncitizen is considered to be a Resident Alien, the U.S. transfer tax rules apply to his or her assets worldwide.

Non-resident Aliens Have More Latitude

A Non-Resident Alien is subject to the U.S. transfer tax rules only if the title or property is legally located in the U.S.

Remember That Tax Credits Apply

Non-Resident Aliens are allowed a U.S. estate tax credit of $13,000 which essentially shields the first $60,000 of the estate from taxation.

If you’re in a marriage between an U.S. citizen and a non-U.S citizen, you may face additional wealth transfer challenges.

Estate Taxes Work Differently 

When two U.S. citizens are married, the surviving spouse can inherit any amount of money free from federal estate taxes. This is not true for a non-U.S. citizen. In other words, any assets passed to a non-U.S. Citizen spouse (even if they are a resident alien and hold a green card), are subject to federal estate taxation over the allowable exemption.

Trusts May Help Protect Assets

 A Qualified Domestic Trust (QDOT) may help avoid federal taxes when one spouse passes. With a QDOT, at the first spouse’s death assets are put into a qualified trust. The surviving spouse receives income from the trust, but does not own the trust assets. It is important to keep in mind that a QDOT only defers estate taxation; U.S. Estate taxes will still be due at the surviving spouse’s death.

Life Insurance Offers Tax Benefits 

A Non-Resident Alien may own a life insurance policy on her/her own life and, unlike a U.S. Citizen, the death benefit will NOT be subject to U.S. estate tax. In addition, life insurance offers both Resident and Non-Resident Aliens tax deferred growth of cash values and federal income tax-free death benefit. Because of these tax advantages, life insurance can be one of the best options for providing liquidity to pay estate taxes on U.S. based property.

The Wealth Management world is increasingly international, resulting in a multitude of new opportunity. If you’re not sure how your assets will be taxes, processed or handled in the U.S., give me a call and we can map out a plan that makes the most sense for your unique situation.

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Mark A. Vergenes is President of MIRUS Financial partners, 110 E. King St., Lancaster; 717-509-4521 or mark@mirusfinancialpartners.com  Investment Advisor Representative offering securities and advisory services offered through Cetera Advisor Networks LLC., member FINRA/SIPC. Cetera is under separate ownership from any other named entity.  MIRUS Financial Partners nor Cetera Advisor Networks LLC. give tax or legal advice.