Love knows no bounds, and in a state as diverse and dynamic as New York, it’s common for marriages to cross national and cultural lines. If your spouse happens to be a non-citizen of the U.S., you may be wondering what challenges could arise if this love outlasts your life: meaning, how can you ensure that your spouse receives the assets you intend to leave behind?
It is important to initially establish that non-citizen spouses are legally allowed to inherit property and other assets in New York. However, estate planning in this scenario isn’t as straightforward as it is with a citizen spouse. Without the proper preparation, your spouse may face significant tax consequences or delays in receiving what you’ve delegated to them.
To protect your legacy and your loved one’s future, it’s essential to take action now. Below is a detailed overview of some asset protection strategies you can use when your spouse is not a U.S. citizen.
“Unlimited” Marital Deduction: Fully Limited for Non-Citizens
To begin, it’s helpful to understand which traditional spousal estate planning methods do not apply to a non-citizen spouse. Perhaps the most prominent example is the Unlimited Marital Deduction, a provision established by the IRS that allows a U.S. citizen to transfer an unlimited amount of assets to their spouse upon death without incurring federal estate taxes.
This benefit, however, is only available when the surviving spouse is a U.S. citizen, and unfortunately does not apply to lawful permanent residents or individuals with temporary or no visas—meaning that any assets transferred to a non-citizen in New York could thus be subject to federal estate tax. As a result, other steps must be taken to ensure that your spouse receives the assets you’ve designated for them.
Qualified Domestic Trust (QDOT): A Crucial Tool for Non-Citizen Spouses
QDOT Essentials: How It Works and What You Must Know
One of the most effective strategies for transferring assets to a non-citizen spouse is through a Qualified Domestic Trust (QDOT). A QDOT permits a surviving spouse who is not a U.S. citizen to qualify for the marital deduction, which enables them to delay federal estate taxes that would otherwise apply. This structure consequently allows for the unlimited transfer of assets to the non-citizen spouse while still acting in accordance with U.S. estate tax laws. Income from the trust is also tax-free.
A QDOT is an irrevocable trust, meaning it cannot be altered or repealed following its creation. In order for it to be properly facilitated, it is required for one trustee to be either a U.S. citizen or a U.S.-based financial corporation (in this case, a New York trust company or bank).
Furthermore, a QDOT does not need to be established in the deceased’s will, as the surviving spouse can create one themselves if it is properly funded before the estate tax return is filed.
There are two types of QDOTS: large and small QDOTs. QDOTs with assets exceeding $2 million are classified as large and must provide the IRS with a bond or an irrevocable letter of credit equal to 65% of the trust’s value. In contrast, QDOTs valued under $2 million are considered small and are exempt from this requirement, as long as no more than 35% of their assets are located outside the United States.
When Are QDOT Distributions Subject to Federal Estate Tax?
Any principal distributions taken out of the QDOT by the surviving spouse are subject to U.S. estate tax once the citizen spouse passes. Take this example: a few years after her husband Jack’s death, Jill, who is not a U.S. citizen, requests $500,000 from the QDOT they established to purchase a new house. The trustee approves her request and distributes the money to her. However, because this distribution is from the principal of the QDOT (meaning they are the original assets placed in the trust), the $500,000 is subject to U.S. estate tax when it is distributed.
There are certain exceptions to the estate tax rule for principal distributions from a QDOT due to hardships, such as health issues, educational expenses, and basic living needs. For example, if Jill has respiratory problems and requires $500,000 for immediate medical treatment, and Jack had specified in the QDOT that this health condition qualifies as an “immediate and substantial financial need,” then the trustee can distribute the funds without triggering federal estate tax, provided Jill submits the necessary medical documentation to prove it.
How a Spousal Lifetime Access Trust (SLAT) Can Help Protect Your Legacy
A Spousal Lifetime Access Trust (SLAT) allows one spouse to transfer their own assets into a trust while still retaining indirect access to those assets through the other spouse, who is considered its beneficiary. A SLAT is considered a grantor trust, meaning that the individual who creates the trust (the grantor) is treated as the owner of its assets for income tax purposes. In this case, the citizen serves as the grantor, creating the trust to provide the non-citizen spouse with access to their personal funds. Once their assets are transferred into the trust, they are effectively protected from taxes. Additional assets can later be distributed to the pair’s children or other designated beneficiaries.
Despite this, if the non-donor spouse were to pass before the donor spouse, the donor would lose their indirect access; meaning, continuing the example from above, if Jack and Jill were to have established a SLAT instead, and Jill were to pass away first, Jack would no longer be able to take out the assets held in the trust. Additionally, an SLAT can only be established during the donor’s lifetime, offering less flexibility compared to a Qualified Domestic Trust (QDOT). It is suggested that you take some time to deliberate with a professional before deciding which option would be best for you.
Becoming a U.S. Citizen: The Best Way to Avoid Estate Tax Issues
It is strongly recommended that, if viable, the individual apply for citizenship as soon as possible, as all issues of non-citizenship can be avoided if the non-citizen spouse applies to become a citizen. If the surviving spouse obtains citizenship by the time the deceased’s federal estate tax return is due, the unlimited marital deduction will apply, meaning that none of the special rules for non-citizens will be applicable any longer. A non-citizen spouse generally has nine months after the date of death to obtain citizenship. Ultimately, this is the most effective way to prevent additional taxes on inherited assets. New York offers many resources, whether they be legal aid organizations or citizenship preparation programs, that can help further support this process.
If you become a U.S. citizen after a Qualified Domestic Trust (QDOT) has already been established, the QDOT can be terminated as well. A Spousal Lifetime Access Trust (SLAT) can also be created between two U.S. citizens, so it can be difficult for an individual to revoke it later if the possibility of citizenship was not initially outlined in the SLAT’s terms.
Don’t Wait: Take Immediate Steps to Secure Your Spouse’s Inheritance
Life is full of uncertainties. For non-citizens in New York, everyday challenges like securing employment or purchasing a home can be especially difficult. That’s why it’s crucial to take immediate steps to protect your assets and plan your inheritance—ensuring your family’s future security and peace of mind, no matter what the future holds.
The best step you can take to secure your and your spouse’s financial future is to encourage your spouse to apply for U.S. citizenship, as it is the quickest way to unlock important tax benefits. However, obtaining citizenship certainly comes with its own difficulties. If your spouse has any reservations, it’s crucial to consult thoroughly with a New York attorney before deciding between a QDOT and an SLAT: both are irrevocable trusts, meaning that once established, any mistakes cannot be undone. An attorney can further help you make sure that all estate planning documents comply with New York law, including any wills or trusts you choose to execute.
Choosing the right estate planning option can be complicated, given the legal complexities involved in setting up and managing trusts like QDOTs or SLATs in New York. It is highly recommended that you consult a qualified estate attorney to guide you through both the creation and finalization of these plans, ensuring the best outcome for your family.
As an immigrant herself, Ms. Inna Fershteyn brings a unique cross-cultural perspective to estate planning and your family’s situation. She is fluent in Russian, Ukrainian, and English, and her practice serves a highly diverse, multinational client base. Furthermore, Ms. Fershteyn is especially attuned to how immigration status—including the often-overlooked importance of U.S. citizenship—can directly affect one’s ability to inherit and own property in New York. Having an experienced and culturally competent attorney can make a huge impact on your family’s financial future. If you need assistance, don’t hesitate to contact the Law Office of Inna Fershteyn at (718) 333–2394 to speak with her and help secure your family’s stability.
Q&A: Estate Planning for Non-Citizen Spouses in New York
1. Can a non-citizen spouse inherit property in New York?
Yes, non-citizen spouses can legally inherit property and assets in New York.
2. What happens if we do nothing and I (the citizen) pass away first?
Your spouse may owe significant estate taxes, not be able to access assets, or even lose property without proper planning.
3. What if my spouse only has a green card? Do we still have to take alternate measures?
Yes. A green card does not qualify for the unlimited marital deduction.
4. Do we still need a trust if we’ve been married for years and share everything?
Yes. Length of marriage doesn’t protect against estate taxes for non-citizen spouses.
5. What if my spouse becomes a citizen after I die? Will that help?
Only if they become a U.S. citizen within nine months after your death and before the estate tax return is due.
6. Can my non-citizen spouse stay in our house after I die?
Yes, but to ensure a smooth transfer of ownership, you need to plan with either a QDOT or an SLAT.
7. How soon should we start planning?
As soon as possible. Delaying until an emergency can limit your options and lead to delays, legal trouble, and stress.