Introduction
Estate planning can be a confusing process, and it’s especially so for non-US citizens. While citizens and non-citizens have access to the same estate planning tools (power of attorney, wills, trusts, etc.), the applicable tax laws can vary significantly.
Without proper planning, a non-citizen’s estate may face substantial estate taxes, and gifted assets may get tied up in probate court or ultimately fail to pass to the intended beneficiaries. As such, non-citizens should always consult an estate planning attorney to make sure their estate plan minimizes estate tax exposure and correctly dispositions gifted assets.
Before you meet with your estate planning attorney, here ten tips to help the process make a little more sense:
- Define your domicile and your property’s situs
- Appoint a legal agent
- Appoint a healthcare proxy
- Draft an advance directive
- Plan for your funeral and burial
- Prepare for estate taxes
- Draft a last will and testament
- Make a plan to distribute non-probate assets
- Consider establishing a trust
- Review your estate plan regularly
1. Define Your Domicile
A non-citizen is considered to be domiciled in the United States if they live in the US and have no present intent to leave. When determining domicile, the IRS may consider the following:
- A statement of intent
- Length of residence
- Green card status
- Style of living, in the United States and abroad
- Ties to foreign countries
- Location of business interests
- Locations where affiliations are maintained, such as club membership, churches, voter registration, etc.
2. Appoint a Legal Agent
If you become incapacitated during your lifetime, you will need an authorized agent to manage your affairs on your behalf. This person will need the legal authority to access your financial accounts, pay your bills, buy and sell property, and ensure all your needs are provided for. To do this, draft a durable power of attorney and appoint a family member or friend to serve as your attorney-in-fact. Note that your attorney-in-fact does not need to be a US citizen—appointing a non-citizen is perfectly legal.
3. Appoint a Healthcare Proxy
On a similar note, if you’re incapacitated you’ll need to provide someone with access to your medical files, and with the authority to speak with your doctors and make important medical decisions on your behalf. This individual is called your healthcare proxy. If your healthcare proxy is the same as your attorney-in-fact, then you can grant them healthcare access in the same durable power of attorney. If the healthcare proxy is a different person, you’ll need to draft a separate healthcare power of attorney.
4. Draft an Advance Directive
An advance directive (sometimes called a living will) is a legally-binding document that expresses your healthcare preferences to your doctors. If you become incapacitated and cannot communicate important medical decisions, your doctors will consult this document to determine whether or not you’d approve of their recommended procedures and treatments. This may seem redundant if you have a healthcare proxy, but it’s extremely helpful to have both, as the advance directive gives your healthcare proxy clear instructions to follow in case there is uncertainty.
5. Plan for Your Funeral and Burial
Your passing will be an emotionally difficult time for your loved ones. Make their mourning process a little easier by clearly expressing your funeral and burial plans. If your financial situation allows, it’s best to purchase pre-needs services from a cemetery or crematorium, so everything is set and paid for when you pass away.
If that’s not feasible, then you should at least make your intentions clear and indicate which of your assets should be used to cover the costs after you die. Write these instructions down in a letter of intent, leave the letter with a family member or friend, and ask them to bring the letter forward when you pass away.
6. Prepare for Estate Taxes
When it comes to property (both real estate and personal property), the term “situs” refers to where the property is being treated for legal purposes. If a non-citizen is domiciled in the US, all of their assets across the world will be subject to estate taxes. If a non-citizen is not domiciled in the US, only their property with situs in the United States will be subject to estate taxes.
As of January 1, 2018, individual estates with less than $11.2 million are exempt from estate taxes, and joint estates with less than $22.4 million are also exempt. If a citizen or domiciled non-citizen has assets in excess of these values, only the value in excess of the exemption will be subject to an estate tax. The actual tax will vary depending on the final value of the estate.
Non-domiciled non-citizens are only exposed to US estate taxes to the extent their property has situs in the United States, so it’s likely that only a portion of their assets will be taxed by the US. Unfortunately, the federal estate tax exemption for such situations is only $60,000. Any assets with situs in the US will be subject to estate taxes ranging from 18% – 40%.
7. Draft a Last Will and Testament
While most estate planning attorneys will recommend that non-citizens transfer assets to their heirs through a trust rather than a will, it’s still important to draft a will. At the very least, your will should name a guardian for your minor children, appoint an executor (aka personal representative) to handle your estate, and include a pour-over statement that directs any assets not transferred via a trust. For the will to be valid, the person writing the will (known as the testator) needs to sign and date the will in the presence of two witnesses, and have the witnesses sign the will. If you choose to bequeath assets to beneficiaries with a will, note that you can gift assets to non-citizens.
8. Make a Plan to Distribute Non-Probate Assets
Before we dive into trusts, it’s important to note that some assets are designed to pass to a beneficiary without the need for a trust, a will, or probate court. These assets usually have a beneficiary listed on the account’s contract, and the financial institution will automatically transfer the assets to the beneficiary when they’re presented with a copy of your death certificate. Assets like this include:
- Bank and brokerage accounts with a payable-on-death or transfer-on-death beneficiary
- Life insurance policies
- Retirement accounts
- Property owned in joint tenancy or as tenants in the entirety
For these assets, all you need to do is make sure the right beneficiaries are listed on the accounts. It’s still a good idea to discuss your plan for these assets with your estate planning attorney, however, as it may be in your best interests to transfer some of these assets to a trust.
9. Consider Establishing a Trust
There are four primary distinctions when it comes to trusts: living, testamentary, revocable, and irrevocable. A living trust is established during your lifetime, where a testamentary trust is created when you die (usually via instructions in your will). A trust is revocable if the person gifting assets to the trust (the trustor) maintains the ability to amend or dissolve the trust and retake their assets. A trust is irrevocable if the terms of the trust cannot be changed by the trustor. When a trustor dies, a revocable trust automatically becomes an irrevocable trust.
The most widely used type of trust for estate planning is a revocable living trust. This type of trust allows the trustor to maintain control over the assets by serving as the trustee, and continue to benefit from the assets as the primary beneficiary. When the trustor dies, a successor trustee will step in to transfer the trust’s assets to the successor beneficiaries.
This transfer will take place outside of probate, without the direction of a will. Depending on your situation, your estate planning attorney will probably recommend non-citizens transfer the majority of their assets through a trust to avoid legal problems when you pass away.
If you have a large estate that may be subject to estate taxes, talk to your attorney about using an irrevocable trust to transfer assets out of your estate with the hope of minimizing your exposure to estate taxes when you die. The value of assets that you transfer to an irrevocable trust will count towards your lifetime estate tax exemption, but with early planning it is still extremely beneficial.
Call our Arizona Estate Planning team at (480)467-4325 to discuss your case today.