A critical distinction in federal estate and gift taxation is made between resident aliens and non-residents. Different taxation rules apply to non-residents than to resident aliens, who are taxed the same as U.S. citizens. Residency status for estate and gift tax is different than the rule for income tax purposes, which is determined by the “green card” test of Internal Revenue Code section 7701(b).
For estate and gift taxes under federal law, whether someone is a resident alien (and therefore taxed the same as a U.S. citizen) depends upon whether they are legally domiciled in the United States, and establishing domicile is different in every situation – it depends upon the individual’s intent. That intent must be proven with admissible evidence of facts and circumstances that demonstrate the decedent’s intent to domicile within the U.S.A.
For taxation purposes, this distinction has tremendous financial implications. For example, permanent residents of the United States are entitled to the same exemption that U.S. citizens receive, while non-resident aliens receive only a $60,000 exemption.
Furthermore, when a husband and wife are involved and one or both of them is not a U.S. citizen, then the issue of estate taxation can become very complicated.
As a general rule, an American citizen can leave his or her American citizen-spouse an unlimited amount at their death – without any tax liability to their estate. (With careful planning, the surviving spouse will avoid estate taxation, as well.) Not so for aliens.
A citizen-spouse cannot enjoy the same benefits when bequeathing property to his or her non-citizen spouse. The alien spouse does not qualify for the surviving spouse exemption, and the citizen spouse’s estate will be taxed upon their death. If the non-citizen spouse dies first, the tax liability is determined based upon his or herstatus as either resident or non-resident.
What Treaties May Apply – and To What Assets
The key to estate planning for resident aliens and non-U.S. citizens therefore is to minimize the assets that will be required to enter into the Maryland probate process. And this begins with a consideration of the individual’s home country. The United States has entered into treaties with many foreign countries regarding estate planning issues, in order to help individuals hailing from these foreign lands avoid the possibility of having their single asset taxed by both countries upon their death ("estate tax treaties"). These treaties limit the amount of double taxation, or completely prevent it, depending upon their individual provisions.
Thus, resident aliens and non-U.S. citizens need to know if their homeland has such a treaty with the United States, as do these countries:
1. Treaties granting right to tax to the country of domicile except for real property and property associated with a permanent business establishment in the country where the land or business is physically located:
2. Treaties granting right to tax to the country where the asset is physically located at the time of decedent’s death: