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The marriage exemption’s big exception

In the United States, married people inherit from their spouses without paying estate tax. Most of the time.

The unfortunate exception is a little-known law involving marriages between a U.S. citizen and a foreign national. If that couple are your clients, it’s a big hitch in their estate planning.

Under U.S. law, if the American citizen is the first to die, the surviving foreign national spouse can’t use the standard marital deduction to inherit property outright. The entire estate is subject to this rule if the couple lives in the U.S.; if they live overseas, only U.S.-based assets are affected.

The current $11.4 million estate tax exemption makes this a problem only for quite wealthy couples. In 2026, however, the estate tax exemption is scheduled to revert to the 2017 amount of $5.49 million, so estate planning will become more complex for a greater number of mixed-nationality couples.

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Without the marital deduction, these couples have several, admittedly less attractive, options.

The foreign spouse can become a U.S. citizen. If dual citizenship is an option — some countries allow this, some don’t, and tax ramifications also vary —that arrangement could let the foreign spouse maintain sentimental ties and retain the option of moving back to his or her original country after the U.S. spouse’s death.

If the foreign spouse decides to acquire U.S. citizenship, it’s important to complete the process before the American spouse dies. After the U.S. spouse’s death, the survivor has just 15 months to become a citizen, move the money into a trust, or pay estate taxes. That’s typically not enough time to complete the citizenship process.

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Citizenship is the option the clients of Hui-chin Chen, a planner at Pavlov Financial Planning in Arlington, Virginia, most often take. “Either the green card holder becomes a citizen or the couple are planning to move abroad,” he says. “Green cards are supposed to be temporary.”

If citizenship doesn’t appeal, a qualified domestic trust, or QDOT, is an alternative. The assets go into trust for the surviving spouse, who receives income from the trust but cannot spend the principal without showing hardship or paying estate tax on the portion of the principal that exits the trust. The QDOT needs either a U.S. citizen or bank as trustee.

A QDOT can be set up before or after the U.S. citizen’s death, and can also buy the surviving spouse time to obtain citizenship. The freshly minted American can then unwind the trust and take the inheritance tax free under the marital deduction. No matter when the trust is funded, its creators can decide which assets to include in the trust, with the inheriting spouse paying estate tax on any excluded items that push the estate over the tax threshold.

That could solve the problem for the inheriting spouse but create a new issue for the couple’s children. Assets in a QDOT are essentially taxed twice when the second spouse dies: once in the first estate, which is treated as tax deferred, and once in the second spouse’s estate. Retirement plans placed in a QDOT also suffer adverse tax consequences, because disbursements include both growth and principal.

If neither citizenship nor a QDOT is a good fit for a client couple, there are a few other options. An estate tax treaty between the U.S. and the foreign citizen’s country may say that the foreign spouse can inherit outright, at least in part.

For instance, treaty agreements let German and French nationals (but not Brits) inherit half of an American spouse’s estate, tax-free. For an estate of more than $22.8 million, that could matter. Survivors must choose either treaty provisions or a QDOT—not both, says Bruce Stone, a partner at Holland & Knight LLP in Miami.

He advises to title more property in the foreign-born spouse’s name, including annual gifts from the U.S. spouse. The more the foreign spouse owns, the less estate tax will be due. Stone further counsels to keep close records of where, when and how much the foreign citizen spouse contributed to the couple’s wealth.

Bruce and Tiger
“The spouse who died first is assumed to have contributed everything, so the burden is on the survivor to prove that he or she made a contribution,” says Bruce Stone, a partner at Holland & Knight LLP in Miami.

“The spouse who died first is assumed to have contributed everything, so the burden is on the survivor to prove that he or she made a contribution,” he says.

If the U.S. citizen gives gifts to the foreign spouse in ways that would otherwise be eligible for the marital deduction, taxes are due on everything above $155,000 annually — an amount that goes up every year, says Carlyn McCaffrey, a partner at McDermott Will & Emery in New York. Under these rules, a joint account is a gift. “Gift taxes apply from day one,” McCaffrey says.

Mutually owned real estate is also a gift, but taxes aren’t due immediately. “There’s a special provision that says that joint ownership doesn’t involve any immediate gift tax,” she says. “But if you sell it, you have to pay the gift tax.”

Keep in mind that gifts to children and charities made before death can also help shrink an estate to under the tax threshold. Remember, however, that asset shifts could come back to haunt a client who later divorces.

Carlyn McCaffrey
If the U.S. citizen gives gifts to the foreign spouse in ways that would otherwise be eligible for the marital deduction, taxes are due on everything above $155,000 annually — an amount that goes up every year, says Carlyn McCaffrey, a partner at McDermott Will & Emery in New York.

Life insurance in an amount that would likely cover the tax bill is another option, though one that might be prohibitively expensive if the couple’s wealth is significantly more than the estate tax exemption. A survivor could also take the tax-free insurance payout and fund a QDOT with the estate overage, thereby deferring taxes.

If most of the couple’s wealth is overseas, they could move to another country and the U.S. spouse could renounce American citizenship while the American spouse is still hale and hearty.

Die within 10 years of this maneuver, however, and Uncle Sam will still collect his due.

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