As the world becomes more of a global community, it is no longer uncommon for married couples to maintain different citizenship. While a difference in citizenship alone can present complexities from an everyday tax perspective, another set of challenges arises when a non-citizen spouse separates from the US spouse, returns to live in the non-citizen spouse’s home country, and then passes away. What are some of the issues you need to be aware of?
Choice of Law
One of the first questions that must be answered is which country’s laws will apply with respect to inheritance, division of property, child custody, and taxation. Depending on the non-citizen spouse’s country of residence at death, there can be very different legal consequences for owning property at death. Some countries have treaties with the United States that attempt to bring clarity to tax liability issues and division of property at the death of an individual who is married to a non-citizen. However, many countries do not have treaties with the United States that address these issues. As a result, it is imperative to seek competent legal counsel from both countries prior to dividing and re-titling assets, making decisions about the custody and citizenship of minor children, paying taxes, etc. The legal and financial implications of these decisions are very fact-specific and must be addressed with great care and attention to detail.
If You Have No Estate Plan
It is particularly important to get legal counsel from each country if neither you nor your spouse prepared an estate plan before the death of your non-citizen spouse. Each country will have its own default rules that govern the division and taxation of property that is owned by each spouse, either jointly or separately. Without legal counsel, you could end up receiving a notice from the Internal Revenue Service (IRS) or a foreign country’s taxing authority, months or even years in the future, claiming that you owe substantial taxes together with penalties and interest. The costs of sorting out such a mess are likely to be substantially higher than proactively addressing them with legal counsel at the beginning.
If You Have Done Estate Planning in the United States
Depending on the laws of the foreign country involved, creating an estate plan in the United States with your non-citizen spouse may help. On the other hand, there are some important issues you need to be aware of if you have done estate planning in the United States and your spouse dies while residing in another country.
First, it is important to understand that many countries around the world do not recognize trusts as a valid method for estate planning or otherwise holding property. Even more problematic, because some countries do not recognize trusts the way they are recognized in the United States, the country may end up classifying trusts as business entities and will impose burdensome taxes on the property held in these trusts. For example, if a married couple created a joint trust and placed all of their marital property in the trust without international estate planning advice, and then the non-citizen spouse moved to and died in a foreign country, there is a distinct possibility that the foreign country would apply a much higher inheritance tax rate to the surviving spouse when the jointly held property passes to the surviving spouse.
A related problem arises when couples do estate planning in the United States using a revocable living trust, as they will typically also create a pour-over will to accompany the trust. This type of will is designed to transfer all property owned by the individual into the trust at the individual’s death. However, some foreign countries do not recognize a trust as a valid beneficiary of a will. Instead, a country may treat the transfer resulting from a death as invalid and will apply the default inheritance laws of that country to the deceased spouse’s property. This could lead to unexpected negative results, including the property passing to people whom neither spouse would have wanted to receive the property. Beyond that, the trust as a beneficiary of the property may be assessed a much higher inheritance tax as an entity than an individual beneficiary would be.
Other estate planning efforts completed in the United States could also become ineffective with the return of a noncitizen spouse to that spouse’s country of origin. For example, even if the noncitizen spouse named the US spouse as the executor of the noncitizen spouse’s will, the foreign country may not allow a citizen of another country to serve as an executor for one of its own deceased citizens. Rather, it may require that someone from the deceased spouse’s country serve in that capacity. This could have a significant impact on how the property of the deceased spouse is managed and ultimately distributed to the surviving spouse in the United States.
Other issues such as burial arrangements for the noncitizen spouse and obtaining death certificates for making life insurance or financial account beneficiary claims can also become complicated when a noncitizen spouse dies in his or her country of origin.
If the Non-citizen Spouse Completes Estate Planning Outside of the United States
The estate planning that an estranged non-citizen spouse completes after returning to permanently live in the non-citizen spouse’s country of origin can have further implications. In the United States, most states have laws to prevent a person from completely disinheriting the person’s spouse (known as spousal election laws). Such laws may not exist in a foreign country, particularly when it comes to protecting a noncitizen spouse of that foreign country. As a result, if an estranged non-citizen spouse returns to that spouse’s home country and completes estate planning in that country, there may be no requirement to include the US spouse as a beneficiary of any of the foreign spouse’s property. Further, if excluded as a beneficiary, the US spouse’s citizenship might bar any legal challenge to the exclusion.
Although certain countries may have provisions in their treaties with the United States that address such circumstances, this does not eliminate the potential negative tax consequences that could result depending on how the property of the deceased non-citizen spouse was titled or given away.
Additional Issues to Consider
There are a number of other issues that should be considered when estranged spouses live in different countries and the non-citizen spouse dies.
For instance, in some countries, a divorce is easier to obtain, and service of process and notice requirements for divorce proceedings differ from those in the United States. This could lead to a non-citizen spouse obtaining a divorce in that spouse’s home country that severs a US spouse’s legal rights to certain property without the US spouse even being aware of it.
Additionally, if a US spouse and non-citizen spouse jointly own property, surprising tax consequences can result when a spouse dies. For example, the IRS treats property jointly owned by spouses from different countries as 100 percent includible in the estate of the deceased spouse for transfer tax purposes unless the contributions for acquiring the property can be affirmatively traced to one of the spouses. Depending on the applicable tax scheme of the foreign country and whether a treaty exists between the two countries, this could have serious negative tax consequences for the surviving spouse.
We Are Here to Help
Property ownership between spouses with different citizenship can be a huge can of worms if the spouses separate and reside in their respective home countries with unresolved estate planning matters. Property ownership between such spouses can be complicated even during life. Those issues become exponentially more complicated at death, particularly if the couple did not work together and with competent legal counsel to address the issues proactively.
If you are in this situation, let us help you ask the right questions and begin to address the sticky estate planning issues that you are facing. The best time to address them is now, before they have a chance to become any more complicated than they need to be.
 For a list of countries that currently have active treaties with the United States, see https://www.irs.gov/businesses/small-businesses-self-employed/estate-gift-tax-treaties-international.
 I.R.C. § 2040.