US Estate Tax, Mixed marriages and QDOTS

The US charges Estate Tax on the transfer of property on death, as well as charging Gift Tax as a result of transfers during life. US Domicilaries and US Citizens are exposed to worldwide Estate and Gift Tax while non-US domicilaries are charged in respect of US situs property only.

A person may be domiciled in the US if they live in the US and while there they had no definite present intention of leaving. Simply being US resident or owning US assets is not enough. Although there may be a general presumption that a green card holder would have acquired a domicile there.

Currently the US has a $5.43m combined lifetime Estate and Gift Tax exemption, but a non-US person only has a $60,000 exemption against their US assets transferred on death.

US citizens or domicilaries who are resident or have assets overseas e.g. in the UK, will have to take into consideration both the US Estate and Gift Tax rules but also the local rules e.g. UK Inheritance taxes.

One of the main problems arising for international families concerns the absence of a US inter-spousal exemption. Many people assume that transfers between husband and wife are universally exempt from Estate or Gift Tax. This is not in fact the case. For US tax purposes the exemption applies only to the extent an asset is being transferred to a US Citizen spouse. Transfers from a US citizen spouse to a non-citizen spouse, or even transfers between two green card holders considered domiciled in the US simply do not qualify. So in such mixed marriages, it is quite possible that there can be unexpected charges on a transfer, or even double tax charges on the second death if exposed to a local tax charge.

When you consider the interaction of the small number of US Estate and Gift Tax treaties, and the potential to hold assets in third or even fourth country locations, wealthy individuals, and particularly those in mixed marriages should certainly consider taking advice.

The US/UK High Net worth Team has a number of specialists well versed in advising wealthy individuals of families with multi-jurisdictional assets in how to optimise their planning.

For example in a UK/US family the US spouse might make provision for a Qualified Domestic Trust to hold assets that would otherwise be passed to their UK spouse. This would provide access to the income and potentially the assets during their lifetime, but would defer the US Estate tax charge until assets were withdrawn or the second death. This can align the US charge with the UK charge on the second death allowing the taxes to credit against each other preventing a double tax charge.

Did you find this useful?