Estate planning when one or both spouses are not U.S. citizens

For many California families, life and financial interests extend across national borders. One or both spouses may retain citizenship in China, India or another country while establishing their home, raising children and accumulating substantial assets in the United States.

These circumstances require particular care in estate planning. Federal law limits the marital deduction when the spouse receiving property is not a U.S. citizen, even if both spouses have lived in California for decades. A carefully structured plan can provide for the surviving spouse while addressing the tax consequences of transferring family wealth.

Citizenship and domicile serve different purposes

Citizenship and domicile are separate considerations under federal estate and gift tax law.

U.S. citizens and individuals domiciled in the United States generally are subject to federal estate tax on their worldwide assets. Domicile depends on residence and the intention to remain indefinitely. It is distinct from residency for income tax purposes, and holding a green card does not, by itself, resolve the question.

A noncitizen domiciled outside the United States is subject to a different estate tax framework, generally involving certain U.S. assets and a substantially smaller exemption, unless an applicable treaty provides relief. Determining each spouse’s status is therefore an essential first step. IRS guidance on domicile.

The marital deduction has an important limitation

Qualifying transfers to a U.S. citizen spouse generally receive an unlimited marital deduction. This allows property to pass between spouses without an immediate federal gift or estate tax, although estate tax may arise at the surviving spouse’s death.

Transfers to a noncitizen spouse generally do not receive the same deduction. The limitation concerns the citizenship of the spouse receiving the property and can apply whether the transferring spouse is a U.S. citizen or a noncitizen domiciled here. IRS marital deduction guidance.

The absence of a marital deduction does not necessarily result in estate tax. For 2026, the federal estate and gift tax exemption is $15 million per person for U.S. citizens and U.S. domiciliaries. Prior taxable gifts generally reduce the exemption available at death. An estate within the decedent’s remaining exemption may pass to a noncitizen spouse without federal estate tax; a larger estate requires additional analysis. The top federal estate tax rate is 40%. IRS estate tax guidance.

A qualified domestic trust may defer estate tax

A qualified domestic trust, or QDOT, can preserve the estate tax marital deduction for qualifying property passing for the benefit of a noncitizen surviving spouse.

The trust must satisfy specific requirements governing its terms, trustees and security for payment of tax. The executor must also make the required election on the decedent’s estate tax return. A conventional revocable living trust does not automatically satisfy these requirements. IRS QDOT requirements.

A QDOT generally defers estate tax rather than eliminates it. Income distributed to the surviving spouse generally is not subject to the special QDOT estate tax, although income tax may apply. Principal distributions generally trigger QDOT estate tax unless an exception applies, including certain qualifying hardship distributions. Property remaining in the QDOT at the surviving spouse’s death generally is also subject to that tax.

The arrangement can provide financial support for the surviving spouse, but its distribution rules, administration costs and continuing tax obligations should be evaluated as part of the overall estate plan. IRS QDOT tax guidance.

Lifetime gifts offer another planning opportunity

Although the unlimited gift tax marital deduction generally is unavailable for transfers to a noncitizen spouse, federal law provides an increased annual exclusion for qualifying gifts.

For 2026, that exclusion is $194,000. It replaces, rather than supplements, the ordinary $19,000 annual gift tax exclusion for those gifts. The special exclusion generally applies to qualifying present interests in property. IRS 2026 inflation adjustments.

A deliberate gifting program may reduce the transferring spouse’s future taxable estate. The analysis should also account for the recipient spouse’s estate, the property’s income tax basis, liquidity and each spouse’s financial security. Gifts exceeding the available annual exclusion may require a gift tax return and use part of the donor’s lifetime exemption without necessarily producing an immediate tax liability. IRS gift tax guidance.

A subsequent change in citizenship may affect the plan

Naturalization can alter the available planning options. A statutory exception may permit the estate tax marital deduction if the surviving spouse becomes a U.S. citizen before the estate tax return is filed and has remained a U.S. resident continuously from the decedent’s death until naturalization. The filing date and residency requirements warrant careful attention. Internal Revenue Code § 2056(d)(4).

A surviving spouse’s later naturalization may also end future QDOT taxation when the applicable conditions and reporting requirements are satisfied. It does not automatically reverse taxes previously imposed. IRS guidance on citizenship following establishment of a QDOT.

Citizenship decisions carry personal, legal and financial consequences beyond the estate plan and should be evaluated with appropriate counsel.

Planning that reflects your family and your assets

An effective plan begins with each spouse’s citizenship and domicile, the ownership and value of family assets, prior taxable gifts and the intended disposition of property. Existing trusts and beneficiary designations should be reviewed together to determine whether they provide appropriately for the surviving spouse.

Families with property abroad may also require coordinated advice concerning local inheritance law, taxation and the recognition of U.S. trusts. A California estate plan should be developed with an understanding of those interests and the limits of its operation in another jurisdiction.

At American Trust Institute, we advise California families on estate plans that reflect their circumstances, responsibilities and intentions. Attorney Cynthia Lee personally designs and reviews every plan. Consultations are available in English, Cantonese or Mandarin, by Zoom or at our San Jose and San Francisco offices. Request an appointment.