Estate planning is a must do for all couples. And for many in the United States it’s fairly straightforward: create a simple will which leaves all assets to the surviving spouse. If one spouse is not a U.S. citizen, however, the couple could find themselves looking at three major problem areas.

These estate planning pitfalls are somewhat technical, so we’ll use a hypothetical case of a married couple living in the United States (“John” and “Francesca”) to illustrate.

Francesca is an Italian citizen and John is a U.S. citizen. Francesca is an artist and does not have a consistent income. John works in a large corporation and has a healthy income. They own a home together worth $2,000,000. They have simple wills they did themselves. What are they missing?

No unlimited marital exemption

When you are married, the presumption is that you and your spouse share assets. You can transfer money in and out of savings accounts, brokerage accounts, checking accounts, and the like. Yes, there are exceptions, but for the majority of couples the presumption is that almost all assets are shared.

That also means in most cases that at the death of the first spouse, all assets get transferred to the surviving spouse. If the couple are both U.S. citizens, there are no estate taxes due on this transfer.

But in case of John and Francesca, our fictional couple, that isn’t true. If John dies first and transfers all assets to Francesca, she will owe estate taxes since she is not a U.S. citizen. There is no unlimited marital exemption which would delay estate taxes from being due until her death.

Why? In theory Francesca could take her inheritance from John and go back to Italy and die there not owing U.S. taxes. So the law is designed to allow the federal government to get its money at the first death.

If John dies first, because John is a U.S. citizen, he gets the benefit of the unlimited marital exemption. He will be able to inherit from Francesca and not owe taxes.

Since no one knows who will die first, this is an issue that needs to be addressed when couples of differing citizenship do their estate planning.

Jointly owned property is not split 50-50

Not only do estate taxes apply, but the estate itself could be bigger than expected because of rules about how property is treated when a spouse is not a U.S. citizen.

With a couple where both spouses are U.S. citizens, joint property is assumed to belong to each spouse equally. If one spouse is not a citizen, that is not true.

Our hypothetical couple, John and Francesca, jointly own their home. If they were both citizens, it would be considered to be owned 50-50 or $1,000,000 each. Since Francesca is not a citizen, if John dies first, the whole $2,000,000 home value is considered to be includable in his estate, not just half.

Francesca must prove that she helped pay for the house in order to take some ownership of their home. Let’s say she has paid $100,000 towards the mortgage since they have owned the home. In that case, only the $100,000 that Francesca contributed is excluded from the John’s estate, and his estate will show $1,900,000 value.

This is a huge difference for estate planning purposes. You cannot just plan on each spouse owning half of a house; you actually have to look at what each person contributed.

No unlimited gifting

The ability for spouses to make gifts to each other and buy property together is one that many couples take for granted. But again, if one of the spouses is not a U.S. citizen, gifting can be complicated.

Spouses buy gifts for each other (or at least they should). But if you are married to a non-citizen and you make a gift to your spouse that is valued over $157,000 (for 2020), you will pay gift tax on it.

This rule covers gifts of money, jewelry, and other gift items commonly exchanged. It also applies to the purchase of a joint property.

If a couple buys a property together and the U.S.-citizen spouse pays the entire purchase price, 50 percent of the value is a gift.

So the purchase of a home valued at $2,000,000 or more with your non-citizen spouse would trigger a taxable gift. Why? Because the gift threshold for 2020 is $157,000.

Let’s assume John and Francesca paid $2,000,000 for their home when they bought it, and John’s savings paid for all of it. In the eyes of the law John then made a gift to Francesca of $1,000,000 for the house, even if they owned it jointly, since he paid for it 100 percent.

Now, using 2020 limits, he could gift $157,000 to Francesca with no tax due. However, since the gift was technically $1,000,000, there’s an extra $843,000 to be accounted for. That $843,000 would either be a taxable gift in the year it was made, or it would come off John’s lifetime gift exemption, which is $11.58 million in 2020. Either way, it is something that the couple needs to be aware of.

The bottom line

To be clear, U.S. citizens and permanent residents (green card holders) are currently entitled to the federal estate tax and lifetime gift tax exemptions. But if one of the partners is a non-citizen, the wealth transfer rules that can be taken for granted by many couples no longer apply.

So make sure that your financial planner, attorney, and any other professionals involved in your estate plan are aware that you or your partner or both of you are not U.S. citizens. The planning you do will be inaccurate otherwise and not be worth what you paid for it.

More About Estate Planning Challenges for Non- U.S. Residents

Persons who are not United States citizens, such as non-resident aliens and green card holders, face a challenging United States estate tax planning environment when they invest in United States assets. Starting in 2020, the lifetime gift tax exemption for citizens and United States permanent residents is $11.58 million. This means that you can give up to $11.58 million in gifts over the course of your lifetime without ever having to pay gift tax on it. For married couples, both spouses get the $11.58 million, so a total of over $23.16 million. Instead of that, a nonresident alien is entitled to an exemption of only $60,000 for their United States property. Both nonresident aliens and green card holders may also be subject to estate tax in their country of citizenship, raising the issue of double taxation.

Permanent Residents / Green Card Holders

Permanent residents of the United States, also known as green card holders, are treated essentially the same as United States citizens.  Such persons pay United States income tax on their worldwide income, and pay United States estate and gift tax on their worldwide assets.

Time to Plan is Before Permanent Residence States

Once you receive your green card or your citizenship it is difficult to avoid United States estate and gift tax.  There are standard estate planning techniques available to United States citizens to reduce and minimize such taxes, but these pale in comparison to the estate planning available before one becomes a permanent resident.  The most significant estate planning technique is pre-immigration planning.  At its core, pre-immigration estate planning involves retitling assets and/or moving assets into structures where the assets are not subject to United States estate or gift tax.

Are There Any Pitfalls to Becoming a Permanent Resident?

There are two issues.  The first is that a married couple, both citizens of the United States, can freely move their assets back and forth without paying gift tax (during life), and without paying estate tax (on the death of the first spouse).  The United States estate tax grants an unlimited marital deduction for these gifts and transfers between spouses.  If the spouse receiving the assets is not an actual United States citizen, the tax-free amount that can be transferred is only $157,000 (for 2020), not unlimited.  This is true even if the surviving spouse is a permanent resident.

The second issue is the exit tax that a permanent resident must pay upon giving up the permanent resident status.  The exit tax essentially is a capital gains tax on the appreciation of any assets owned by the permanent resident.  It is basically the same tax that applies to a United States citizen who renounces their United States citizenship.

Nonresident Aliens

Nonresident aliens, essentially persons who are not United States citizens and not permanent residents in the United States, are not subject to United States estate tax, except for certain assets owned in the United States, primarily real estate.  The estate tax is charged at regular estate tax rates, with an exemption amount of only $60,000.  Without proper planning, this tax is quite punitive.

Treaty Relief

The United States has entered into an estate and/or gift tax treaty with a select number of countries including Australia, Austria, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, Norway, South Africa, Sweden, Switzerland, and the United Kingdom. In general, these treaties allow a citizen of one of the treaty countries who owns property to avoid the possibility of both countries taxing the same asset at the time of death. As far as the United States estate tax is concerned, a treaty might reduce or eliminate such tax on the United States property of a nonresident alien.