An estate plan can be designed to serve multiple goals, depending on the individual. Your objectives might be to reduce taxes and transaction costs while providing for the long-term support of loved ones. Someone else might be more concerned with ensuring assets remain in the right hands and simplifying the estate-administration process. Florida estate planning for non-citizens brings in a new set of concerns and can be even more confusing, and thus is the focus of today’s topic.
For example, ease of estate administration in Florida becomes a particularly important aim for non-citizens’ estates due to the overlapping legal authority that often comes into play. Given the heightened potential for jurisdictional complexity, anything you can do in advance to make the process run a little smoother can make a big difference. While the ideal approach varies, Florida estate planning for non-citizens, or more specifically, estate planning strategies for non-U.S. citizens who own property in Florida, can vary greatly from those strategies for individuals who are a resident or non-resident of the United States.
Categories of Non-Citizens
Anyone who was not born within United States territory and who has not gone through the naturalization process to become an American citizen is considered a non-citizen (or “alien” under most relevant federal statutes). Non-citizens fall within one of two classifications: “resident” or “non-resident.” A “resident alien” is a non-citizen who is legally domiciled within the U.S. Correspondingly, “non-resident aliens” are foreign nationals who are not authorized under federal law to permanently live within the United States.
Importantly for purposes of Florida estate planning for non-citizens, both resident and non-resident aliens can own assets in Florida. In either case, the property-owner needs to carefully consider how those assets will be treated in his or her estate plan, giving due consideration to relevant international and federal law, and to the impact Florida probate laws will have on the administration of Florida assets.
Florida Estate Planning for Non-Citizens
[Questions of Jurisdiction]
Under Florida law, property owned in Florida is generally required to pass through probate proceedings in Florida—regardless of the citizenship status or domicile of the owner. For purposes of Florida estate planning for non-citizens, this sometimes means assets need to go through probate in two (or more) jurisdictions: Florida and the property-owner’s country of citizenship.
Needless to say, dealing with multiple probate proceedings can get complicated and significantly increase the costs of estate administration. With that in mind, planning an estate to bypass probate can be especially advantageous for non-citizens. By using jointly titled assets, trusts, beneficiary designations (when possible), and other similar will substitutes in Florida, a non-citizen can bypass Florida probate courts. For example, a Florida revocable trust can be a particularly effective probate avoidance strategy. Instead of descending through a will, non-probate assets pass to the designated successor automatically or pursuant to a private Florida trust administration.
When preparing Florida estate planning for non-citizens who only own a few Florida assets, an alternative to a Florida last will (a/k/a a will substitute), becomes a particularly smart idea. If Florida probate can be avoided altogether, heirs will gain access to inherited wealth more quickly and with fewer administrative hurdles. But, while a will substitute can alleviate the problem of multiple probates, they’re not always as helpful in dealing with another big issue in planning the estates of non-citizens—estate taxes.
Fortunately, for many non-citizens doing Florida estate planning, treaties entered into between the United States and several other nations can sometimes reduce the potential for double taxation by preventing taxation of the same asset in both probate proceedings. This doesn’t completely eliminate estate tax issues, but it can make them a little less difficult to address.
Federal Estate Tax Differences and Florida Estate Planning for Non-Citizens
When preparing Florida estate planning for non-citizens, estate taxes are a huge concern, particularly for those with larger estates. Remember, whether you are a U.S. citizen, resident alien, or non-resident alien, the State of Florida won’t charge you estate taxes. The U.S. government, though, taxes the estates of resident and non-resident aliens with assets in the U.S., and, for good measure, the estates of U.S. citizens legally residing abroad. So, especially for non-citizens with larger estates, careful planning may be necessary to minimize the impact of the Federal estate tax. Importantly, though, federal estate tax treatment is not always precisely the same for citizens and non-citizens.
While the federal estate tax covers all property owned by U.S. citizens regardless of where the property is located, non-resident aliens are only taxed on assets owned within the United States. After all, the government in Washington lacks jurisdiction to tax (for example) real estate in London owned by a British subject. As a result, the jurisdiction in which a particular asset is located (the “situs”) can have a huge impact on an estate plan.
It’s easy to determine the “situs” of real estate. If land is situated within the borders of the United States, its situs is the U.S. It’s not always so simple to identify the situs of other assets, though IRS regulations frequently provide fairly precise tests. In general, securities issued by U.S. companies are considered U.S. assets, but government bonds held by non-residents are not. An experienced Florida estate-planning attorney will consider the relevant regulations when providing advice on organizing an estate for administration.
Another major tax difference affecting estates of non-citizens involves transfers to spouses. The federal tax code’s unlimited spousal exemption (which excludes property inherited by a spouse from estate tax calculations) is only effective if the inheriting spouse is an American citizen. In other words, assets left to a spouse who is a non-citizen (even a resident alien) are subject to the estate tax—regardless of the decedent spouse’s citizenship. Conversely, the unlimited spousal exemption is available to non-citizens who leave wealth to an American citizen spouse.
Notably, the standard personal estate tax exemption ($11.58 million for 2020) is available to estates of citizens and non-citizens alike. So, the difference in the spousal exemption doesn’t end up impacting most estates because most estates aren’t large enough to qualify for the tax. However, for qualifying estates of individuals married to non-citizens, the absence of a spousal exemption can have momentous implications when crafting an estate plan.
The unlimited federal gift-tax exemption for spousal transfers during the taxpayer’s life is also inapplicable to transfers to a non-citizen spouse. However, the tax code allows an annual exclusion ($157,000 for 2020) for gifts to a non-citizen spouse. Thus, strategic gifting can be a good way to reduce overall taxes when transferring assets to a non-citizen spouse.
Another option, the Qualified Domestic Trust (QDOT), can facilitate deferred estate-taxes on property left by an estate to a QDOT for the benefit of a non-citizen spouse. Assets transferred to a QDOT are not subject to estate tax until the surviving spouse’s death, at which point the assets are distributed to successor beneficiaries named in the trust. When the deferred taxes come due at the time of the second spouse’s death, the taxes are charged to the estate of the original spouse—not the estate of the non-citizen surviving spouse.
While useful for their specific purpose, QDOTs are subject to significant limitations. The non-citizen surviving spouse must be the trust’s sole beneficiary during life, and, crucially, the trustee (who must be a U.S. citizen or bank) can only distribute trust income (not principal) to the surviving spouse, absent a documentable hardship.
Foreign Investment in Real Property Tax Act (“FIRPTA”)
For non-citizens who own real estate in Florida, the Foreign Investment in Real Property Tax Act presents another tax consideration that may need to be accounted for within an estate plan. Enacted in 1980, FIRPTA imposes income tax liability on gains earned by foreign individuals and entities arising from the sale of real estate situated in the United States. Taxable gains that trigger FIRPTA are treated as income (not capital gains) and are taxed at regular income tax rates. Many income tax deductions available to U.S. citizens are not applicable to taxes due under FIRPTA.
The broad definition of “real property interest” found within the IRS’ FIRPTA regulations encompasses more than just land and buildings. FIRPTA can also impose tax liability arising from the sale of shares in entities that hold U.S. real estate, underground equipment if it is “inherently permanent” in nature, and other property interests you wouldn’t ordinarily think of as “real property.” Non-citizens with appreciated real property interests in Florida need to carefully consider the potential tax consequences of FIRPTA when choosing an estate planning strategy for the eventual transfer of the interest.
Whether your goal is simplicity, precision, or tax minimization, non-citizens’ estates present planning issues different from the estates of citizens. An experienced Florida attorney can help non-citizen property owners minimize red tape and taxes when transferring Florida property to loved ones.
Steve Gibbs, Esq.