Many traditional estate planning strategies are based on the assumption that everyone involved is a U.S. citizen. But if you or your spouse is a noncitizen, special rules apply that require additional planning.

Generally, U.S. citizens are subject to federal gift and estate taxes on all of their assets, wherever located. But they’re also entitled to various exemptions, exclusions and deductions. These include the gift and estate tax exemption (currently $5.34 million), the annual gift tax exclusion (currently $14,000 per year per recipient), and the unlimited marital deduction, which permits one spouse to transfer tax-free any amount of property to the other spouse during life or at death.

Let’s take a look at how things change when one or more noncitizens are involved.

General rules

If you’re a U.S. resident, but not a citizen, you’re treated similarly to a U.S. citizen by the IRS. You’re subject to federal gift and estate taxes on your worldwide assets, but you also enjoy the benefits of the $5.34 million exemption and the $14,000 annual exclusion. And you can double the annual exclusion to $28,000 through gift-splitting with your spouse, so long as your spouse is a U.S. citizen or resident. Special rules apply to the marital deduction, however, as discussed below.

Residency is a complicated subject. IRS regulations define a U.S. resident for federal estate tax purposes as someone who had his or her domicile in the United States at the time of death. One acquires a domicile in a place by living there, even briefly, with a present intention of making that place a permanent home. Whether you have your domicile in the United States depends on an analysis of several factors, including the relative time you spend in the United States and abroad, the locations and relative values of your residences and business interests, visa status, community ties, and the location of family members.

Tax traps for nonresident aliens

If you’re a nonresident alien — that is, if you’re neither a U.S. citizen nor a U.S. resident — there’s good news and bad news in regard to estate tax law. The good news is that you’re subject to U.S. gift and estate taxes only on property that’s “situated” in the United States. Also, you can take advantage of the $14,000 annual exclusion (although you can’t split gifts with your spouse).

The bad news is that your estate tax exemption drops from $5.34 million to a miniscule $60,000, so substantial U.S. property holdings can result in a big estate tax bill. Taxable property includes U.S. real estate as well as tangible personal property — such as cars, boats and artwork — located in the United States.

Determining the location of intangible property — such as stocks, bonds, partnership interests or other equity or debt interests — is more complicated. For example, if a nonresident alien makes a gift of stock in a U.S. corporation, the gift is exempt from U.S. gift tax. But a bequest of that same stock at death is subject to estate tax. On the other hand, a gift of cash on deposit in a U.S. bank is subject to gift tax, while a bequest of the same cash would be exempt from estate tax.

Your estate planning advisor can help you determine which property is situated in the United States and explore strategies for minimizing your tax exposure. For example, it may be possible to avoid U.S. estate taxes by setting up a foreign corporation to hold U.S. property.

No marital deduction for noncitizens

The unlimited marital deduction isn’t available for gifts or bequests to noncitizens. However, there are three options for making tax-free transfers to a noncitizen spouse:

1. Use the transferor’s $5.34 million exemption (provided the transferor is a U.S. citizen or resident).
2. Make annual exclusion gifts (currently, the limit for gifts to a noncitizen spouse is $145,000).
3. Bequeath assets to a qualified domestic trust, which contains provisions designed to ensure that the assets are ultimately taxed as part of the recipient’s estate.

Know that the marital deduction is available for transfers from a noncitizen spouse to a citizen spouse.

Understand your international rights

If you, your spouse or both are noncitizens, traditional estate planning tools and strategies may not protect you against unnecessary gift and estate taxes. Your advisors can help you understand your options and identify strategies for minimizing your tax liability.