In the U.S., we have a very favorable tax rule in comparison to many other countries, whereby spouses can inherit from each other with no federal inheritance tax consequences. Currently there is also no inheritance tax in CA or AZ, but other states do impose inheritance tax rates.

The accountant still should file certain IRS forms upon the death of the first spouse to preserve that spouse’s exclusionary amount (which is currently $11.7 million).  But one spouse can leave $100 million or more to the other spouse and there would be no federal inheritance tax levied. This is called the Unlimited Marital Deduction. The two requirements are:

  1. The two “spouses” are legally married under the laws of one our States1; and
  2. They are both U.S. citizens. (Green Card holders aren’t citizens.)

The reason for this rule is that the taxing authorities will continue to collect income tax on assets from the surviving spouse and when the surviving spouse dies, the taxing authorities will collect whatever inheritance tax may be due at the second death.  This is why the spouses must be U.S. citizens. If the surviving spouse were a non-US citizen, they could take their inheritance and return to their country with little recourse by the IRS or state taxing authorities.

By comparison, the marital exemption is currently $159,000 per annum for non-U.S. citizen spouses. There are clever things we lawyers can do to mitigate this massive difference in status with gifting strategies and estate planning structures, like QDOT (Qualified Domestic Trust) and QTIP (Qualified Terminable Interest Property) trusts for the non-U.S. citizen spouse to be protected during their lifetime. These affirmative choices and strategies must be taken prior to death, and often significantly prior, in order to reduce the negative inheritance tax consequences.

There are at least sixteen double-tax treaties with mostly European countries that help to minimize the negative impact on a non-U.S. spouse, but these are complicated and costly to apply.  Non-U.S. citizen spouses are often surprised by how very differently the U.S. inheritance tax laws treat them. The fact that the non-U.S. citizen has lived here 20 years, paid their federal and state taxes and has a Green Card is immaterial.  It’s another bright line rule, “you are either a U.S. citizen or you are not.”

There is also a caveat that if the non-U.S. citizen spouse dies first and they are domiciled in the U.S., then the U.S. citizen spouse can inherit without any tax consequences from the IRS. However, that may not be the case for the country of the non-U.S. citizen spouse, and that taxing authority may impose inheritance tax on its deceased countryman’s estate, even if it all goes to the spouse.

But if you are part of a married couple and are both U.S. citizens, then take comfort that in the U.S. we have one of the most generous inheritance tax structures in the world that benefits you.

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Unlimited Marital Deduction for Spouses: But only if you are both U.S. citizens

By C. Margaret Tritch

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