Marrying Michael last year was one of the most exciting events of my life. We had a small wedding at a clubhouse overlooking beautiful Lake Hazeltine in southern Minnesota. I still remember what our priest said to us after he had pronounced us man and wife: “You will both live a long and happy life as long as you remember this one principle: Rachael, you are always right; and Michael, you are never wrong.”
Now that we are passing our honeymoon phase, it has prompted us to contemplate our future life together. When Michael received his green card last month we thought it was the end of our immigration journey. What we didn’t know was that it was just the beginning.
My husband is a Canadian citizen. His entire family lives in Canada and he is very proud to be Canadian. At the moment, he does not have plans to become a U.S. citizen. Normally this would not be a problem for anyone. However, if I were to die unexpectedly and had significant assets, it might be a different story.
No Marital Deduction
Under current law, when a spouse of a married couple dies, the surviving spouse qualifies for a federal estate tax marital deduction. This allows for the descendant to leave unlimited amounts of assets to a surviving spouse, either outright or though a marital trust, with no tax imposed. The only prerequisites for this deduction are that the marriage must be valid and intact at the date of death, and the surviving spouse must be a U.S. citizen. That’s where we hit a snag. Since my husband is a Canadian citizen, the marital deduction would be denied to him, and what would have normally been passed through tax-free is now subject to taxation.
However, all hope is not lost. There are a few ways to remedy this situation. First, if my husband wanted to obtain U.S. citizenship anytime in life before the federal estate tax return was filed, he would qualify for the marital deduction. I suggest doing this sooner rather than later, since in my experience, immigration paperwork is not always processed in an expeditious manner. If the spouse has already died, you only have nine months to file the estate tax return: Citizenship approval may take longer than nine months.
Secondly, a citizen spouse can transfer up to a certain amount of assets each year ($117,000 in 2005) to the non-citizen spouse free from federal gift tax. To qualify for this exclusion, the gift must qualify under the rules for an annual gift tax exclusion. The gift must also meet the requirements for a marital deduction as if the spouse were a citizen. The non-citizen spouse can use the assets for any purpose. If the non-citizen spouse holds the assets until her death, and such assets are subject to the estate tax in the non-citizen spouse’s estate, the applicable exclusion amount can be used to shelter some or all of these assets. This is formally known as the Unified Credit; the total lifetime limit in 2005 is $1.5 million.