Generally, transfers between spouses are free of federal estate and gift taxes, provided that the recipient-spouse is a U.S. citizen. These tax-free transfers are authorized under the so-called “marital deduction” regulations of the applicable federal gift and estate tax laws.

Where the recipient-spouse is not a U.S. citizen, the marital deduction for estate and gift taxes is eliminated. The deceased spouse’s estate will be taxed on the value of property left to a non-U.S. citizen spouse in excess of the deceased spouse’s available estate tax exemption, unless special language is included in the deceased spouse’s Last Will and Testament or Revocable Living Trust or a special tax election is made at the deceased US citizen spouse’s death.

For example, Husband (H) and Wife (W) are a married couple. H is a U.S. citizen. H leaves all of his property that he owns at his death to W. If W is a U.S. citizen, then H’s estate is not liable for any estate taxes. However, if W is not a U.S. citizen, H’s estate will be responsible for the estate taxes imposed on the value of the property passing to W in excess of the estate tax exemption amount.

In the case of lifetime transfers to a non-citizen spouse, the normally unlimited marital deduction is restricted for federal gift tax purposes. In that case, an individual may transfer up to $133,000 annually (as of 2009) to a non-citizen spouse without gift taxes being imposed, provided the gift would otherwise qualify for the marital deduction (for example, a gift of a future interest in property would not qualify).

For example, in 2009 H transfers property valued at $500,000 to his wife, W, a non-U.S. citizen. The transfer to W is fully reported on H’s 2009 gift tax return. However, gift taxes are only paid on $367,000 – the portion that exceeds the $133,000 exemption.

The conclusion, as it pertains to many of our clients, is that there may be significant consequences of giving property to a non-citizen spouse, both at death and during life. If you are, or are married to, a non-U.S. citizen spouse, then special estate planning is needed to minimize the estate and gift taxes your estates will pay.

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About Jeffrey A. Asher

Jeffrey A. Asher is admitted to practice in NY and CT. Mr. Asher is a member of the New York State Bar Association, where he serves on the Executive Committee of the Elder Law and Special Needs Section, the Executive Committee of the Trusts and Estates Law Section, is co-chair of the Legislation Committee of the NYSBA Elder Law and Special Needs Section, is co-chair of the Committee on Elderly and Disabled of the NYSBA Trusts and Estates Law Section, and is Chair of the Elder Law Section of the New York County Lawyers’ Association. Mr. Asher recently appeared in the HBO Documentary “Bobby Fischer Against the World: Fight for the Fischer Estate.” Mr. Asher also is a legal commentator on Trusts and Estates and Elder Law matters for Court TV, TruTV, and CNN Headline News.

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