As the world becomes a global community, it is no longer uncommon for married couples to maintain different citizenships. While a difference in citizenship alone can present complications from a tax perspective, another set of challenges arises. When a noncitizen spouse separates from the US spouse, returns to live in the home country, and then passes away. What are some of the issues you need to be aware of?
Choice of Law
One of the first questions that must be answered is which country’s laws will apply with respect to inheritance. Depending on the spouse’s country of residence at death, there can be different legal consequences for owning property at death. Some countries have treaties with the United States, attempt to clarify tax liability and property issues at the death. However, many countries do not have treaties with the United States that address these issues.
As a result, it is important to seek legal counsel from both countries about dividing and assets. Making decisions about the custody and citizenship of minor children, paying taxes, etc. Attention to detail about legal indicators are needed.
If You Have No Estate Plan
It is important to get legal counsel from each country if there’s no prepared estate plan before the death. Each country will have its own default rules that govern the division and taxation of property. Properties owned by both of you, either jointly or separately. Without legal counsel, you could end up receiving notice, claiming that you owe taxes together with penalties and interest. The costs of resolving such issues are higher than proactively addressing them with legal counsel at the beginning.
If You Have Done Estate Planning in the United States
Depending on the laws of the foreign country involved, creating an estate plan in the United States with your non-citizen spouse may help. However, there are some important issues you need to know if you have done estate planning in the United States and your spouse dies while living in another country.
First, it is important to understand that many countries do not recognize trusts as a valid method for estate planning. There are countries that do not recognize trusts the way they are recognized in the United States. The country may end up classifying trusts as business entities and will impose.
For a list of countries that currently have active treaties with the United States, see it here. For example, if a married couple created a joint trust and placed all of their marital property. The trust without international estate planning advice, and then the noncitizen spouse moved and died in a foreign country. There is a possibility that the foreign country would apply a much higher inheritance tax rate to the spouse when the jointly held property passes to the surviving spouse.
Some countries apply default inheritance laws
A related problem arises when couples do estate planning in the United States using a revocable living trust. This type of will is for transferring property owned by the individual into the trust at the individual’s death. However, some foreign countries do not recognize trust as a valid beneficiary of a will. Some countries may treat the will as invalid and will apply the default inheritance laws of that deceased’s country.
This could lead to unexpected negative results, including the property passing to other people to receive the property. The beneficiary of the property may be charged a high inheritance tax.
Other estate planning efforts completed in the United States could also become ineffective with the return of a noncitizen spouse to that spouse’s country of origin. For example, even if the noncitizen spouse named the US spouse as the executor of the noncitizen spouse’s will, the foreign country may not allow a citizen of another country to serve as an executor for one of its own deceased citizens. Rather, it may require that someone from the deceased spouse’s country serve in that capacity. This could have a significant impact on how the property of the deceased spouse is managed and ultimately distributed to the surviving spouse in the United States.
Other issues such as burial arrangements for the noncitizen spouse and obtaining death certificates for making life insurance or financial account beneficiary claims can also become complicated when a noncitizen spouse dies in his or her country of origin.
If the Noncitizen Spouse Completes Estate Planning Outside of the United States
Estate planning that a noncitizen spouse completes after returning to permanently the spouse’s country can have implications. In the United States, most states have laws to prevent a person from completely cut off from the spouse. Such laws may not exist in a foreign country, particularly when it comes to protecting a noncitizen spouse.
As a result, if an estranged noncitizen spouse returns to that spouse’s home country and completes estate planning. There may be no requirement to include the US spouse as a beneficiary of any of the foreign spouse’s property. Further, if excluded as a beneficiary, the US spouse’s citizenship might do any legal challenge to the exclusion.
Although certain countries may have provisions in their treaties with the United States that address such circumstances. This does not eliminate the tax consequences that could result from how the deceased properties were given away.
Additional Issues to Consider
There are a number of issues considered when spouses live in different countries and die.
For instance, in some countries, divorce is easier to obtain. Service of process and notice requirements for divorce proceedings differ from those in the United States. This could lead to a noncitizen spouse obtaining a divorce in that spouse’s home country. That will serve as US spouse’s legal rights to certain property without the US spouse even being aware of it.
Additionally, if a US spouse and noncitizen spouse jointly own property, surprising tax consequences can result when a spouse dies. For example, the IRS treats property jointly owned by spouses from different countries. As 100 percent includible in the estate of the deceased spouse. Contributions for acquiring the property can be traced to one of the spouses for transfer tax purposes. Depending on the applicable tax scheme of the foreign country and whether a treaty exists between the two countries. This could have serious tax consequences for the surviving spouse.
We Are Here to Help
Property ownership between spouses with different citizenships can be a huge problem. If the spouses separate and reside in their respective home countries with unresolved estate planning matters. Property ownership between such spouses can be complicated even during life. Those issues become more complicated at death, particularly if the couple did not work together and with good legal counsel.
If you are in this situation, let us help you ask the right questions and begin to address the sticky estate planning issues that you are facing. The best time to address them is now, before they have a chance to become any more complicated.