Estate Plans for the Foreign-born

My namesake and great grandfather, Nils P. Johnson, was a Swedishimmigrant who settled on “Swede hill” at the top of the Market Streetbridge in 1905. He was a wholesale grocer and must have been an affableman. Foreign accent and all, he eventually was elected to the OhioSenate.

Times were simpler then both for immigrants and business people. Whengreat granddad came to town, immigration laws were lax and there wasneither an inheritance tax nor an income tax – the latter arriving withthe 16th amendment in 1913 and the former coming a few years later in1916.

These days immigration issues are much in the news in all theircomplexity. For instance, with the unemployment rate at nearly historiclows, businesses in need of highly-skilled employees are pushing for theexpansion of the H1B visa program that gives preference to suchimmigrants.

For that reason, attorneys must have at least some knowledge aboutimmigration issues if they represent business clients. Furthermore, ifthey do estate planning, an attorney must also understand the taximplications of being foreign born.

Let’s consider how gift and inheritance taxes affect the foreign born.

First, a review of the rules for U.S. citizens:

• Each person has a tax credit that permits passing $11.2 million during life or at death to a non-spouse tax-free.
• In addition, a person can gift $15,000 annually (“annual exclusion”exemption) to an unlimited number of people. Spouses together can pass$30,000.
• The new Trump tax law allows the estate of a surviving spouse toemploy the unused portion of the tax credit of the first spouse to die.This means a husband and wife, both citizens, can transfer $22.4 milliontax-free to the next generation.
• A spouse can inherit an unlimited amount of money from the other spouse, using the so-called “marital deduction.”
• A large gift across generations triggers a second tax, the “Generation Skipping Transfer Tax,” on amounts above $11.2 million.
• In 2026, the Trump law sunsets and the amount of a tax-free estate returns to $3 million.

The rules are significantly different for U.S. residents holdingGreen Cards, domiciled in the United States at the time of death:

• One is subject to a gift/estate tax on the value of transferred assets worldwide.
• Each spouse enjoys the individual $11.2 million exemption.
• One can use the $15,000 annual exclusion.
• A surviving spouse is not entitled to use the unused portion of the tax credit of the first spouse to die.
• A surviving Green Card-holding spouse, himself/herself does not get the marital deduction.
• If a special trust (“Qualified Domestic Trust”) is used, the taxthat would otherwise be triggered by the lack of a marital deduction canbe postponed.
• One spouse can gift the other $149,000, without using up any of the $11.2 million exemption.

A nonresident alien (someone in the U.S. lacking a Green Card) istaxed only on property held in the United States. However, his estatetax exemption drops from $11.2 million to $60,000.

It is important that an estate planning attorney always ask clientsabout their nationalities, even if they don’t have an apparent foreignaccent. (Yesterday I met with a woman who spoke American Englishperfectly, but who turned out to be a German citizen holding a GreenCard.)

The time of benign taxation from great granddad’s days are long gone.The estate plan of a Green Card holder, or nonresident alien, willdiffer significantly from that of a U.S. citizen.