Transferring wealth to a spouse who isn't a U.S. citizen can create complex gift, estate and generation-skipping transfer tax challenges. Such transfer tax issues require careful planning, as well as a clear understanding of the differences in how citizens and non-citizens are taxed.
Unlike citizens and resident aliens, a non-resident alien must only pay transfer taxes on assets having a situs in the United States. Since the gross estate of such individuals is limited to U.S. situs assets, the exemption against estate tax is restricted, and deductions from the gross estate must be allocated.
Also, be aware that for federal transfer tax purposes, the term "resident" is defined differently than for income taxes.
For purposes of federal transfer taxes, the term "resident" means an individual domiciled in the United States -- a meaning that is not identical to the meaning of the same term in the income tax context. For income tax purposes, a taxpayer may have a dual residence, while a taxpayer can have only a single true domicile for transfer tax purposes. Determination of domicile is based on subjective review of a number of factors. The ultimate concern is whether the individual intends to remain in the United States for an indefinite period.
Because most countries will assert tax jurisdiction over their own citizens and residents with respect to the entire estate worldwide, and will also assert jurisdiction over assets having a situs within their borders, there is a great potential for double taxation when dealing with international clients.
For example, a resident alien having a domicile in the United States may also be subject to tax by the country of which he or she is a citizen, and may be subject to additional tax if real estate is owned in a third jurisdiction. Such conflicts are generally dealt with under treaties entered into by the respective jurisdictions. Two primary types of estate tax treaties exist:
If an estate is subject to taxation on worldwide assets by more than one country, then each country will allow a tax credit on property physically located in the other country.
If an individual is viewed as a domiciliary of two countries, he or she will be treated as a domiciliary of the country of citizenship if residence was established in the non-citizenship country less than a specific number of years prior to death. If the double domicile dispute cannot be settled by the number of years rule, the treaties...