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Keeping the Dream Alive

With planning, you can help foreign nationals pass on their wealth to the next generation.

By Donna Scalaro, J.D.

The U.S. Census Bureau reports that more than 20 million foreign nationals live in the United States. They have come from disparate regions and worship in churches, mosques and temples.

Despite their differences, many have two things in common. They believe in the American dream and need financial security.

Foreign nationals who spend time and have significant assets in the United States often need life insurance for many of the same reasons as their American neighbors. Wealth transfer, estate planning and business continuation are among the most common.

A 2003 report from the U.S. Census Bureau, The Foreign Born Population in the United States, indicates that the foreign national market is large and thriving. One in four foreign nationals is a professional or manager; for those of European or Asian descent, the ratio is two in five. More than 20 percent of all noncitizens living in the United States earn more than $50,000 annually, according to the Census Bureau. Again, the Census Bureau reports that a higher percentage of those born in Europe and Asia earn higher incomes.

This means that there are approximately 4 million noncitizens who live or work in the United States or who may need life insurance planning services. Often, those needs are acute when you consider how the U.S. Tax Code applies to foreign-born residents. While the Declaration of Independence forever defined America as the land where all men are created equal, not everyone is treated equally when it comes to paying taxes. When it comes to estate- and gift-tax planning in particular, it?s important to distinguish between two types of foreign nationals: resident aliens and nonresident aliens (NRAs).

Resident aliens
In terms of federal estate and gift taxes, a resident alien is a person who is “domiciled” in the United States. This means that he has chosen to make a permanent home here and has no intention of leaving. Factors used to determine an individual’s “intent to remain” in the United States include such things as obtaining a green card, the amount of time he spends in the United States and the purchase of a home here.

Resident aliens are subject to the same estate- and gift-tax rates as U.S. citizens. The estates of resident aliens therefore must pay estate taxes on all property of every kind and nature located anywhere in the world. Currently, the top rate for estate taxes is 49 percent and will decline by 1 percent each year until it hits 45 percent in 2007. Individuals receive a $1 million applicable exclusion amount for transfers at death, and the exclusion amount is scheduled to climb until it reaches $3.5 million in 2009. The annual exclusion for gift taxes is $11,000 (indexed for inflation). A gift by a resident alien encompasses property or assets located anywhere in the world. Current law calls for all estate taxes to be repealed in 2010 and return in 2011, with the highest estate tax rate pegged at 55 percent and the applicable exclusion amount reset at $1 million.

An NRA is a person who is not a U.S. citizen and is domiciled outside the United States. An NRA is subject to federal estate taxes only on property located within, or that has a “situs” within the United States. Examples of U.S. property that would be considered part of an NRA’s estate for tax purposes include real estate, tangible personal property in the United States, shares of stock issued by U.S. corporations and deposits in U.S. banks if those deposits are connected to the NRA’s U.S. trade or business.

Resident aliens are subject to the same estate and gift tax rates as U.S. citizens.

The same estate- and gift-tax rates that apply to U.S. citizens apply to NRAs. However, the applicable exclusion amount for NRAs is limited to $60,000, as opposed to $1 million for U.S. citizens. Although NRAs have the same $11,000 annual gift tax exclusion per individual as U.S. citizens, there is no applicable lifetime exclusion amount applied for gifts made by an NRA.

Gift splitting between spouses is not available unless both spouses are U.S. citizens or resident aliens. Also, if the spouse of a U.S. citizen, resident alien or NRA is not a U.S. citizen, the unlimited gift tax marital deduction is not permitted. The current exclusion for lifetime transfers to non-U.S. citizen spouses is $112,000 annually (indexed for inflation).

The marital deduction
The purpose of the unlimited marital deduction is to treat a husband and wife as a single economic unit. With proper planning, no federal estate taxes are typically imposed upon the first death because ultimately the assets will be taxed in the surviving spouse’s estate.

The Technical and Miscellaneous Revenue Act of 1988 (TAMRA) eliminated the marital deduction provision for assets passing to an alien spouse—either a resident or an NRA. Congress feared that the estate of the first spouse to die would qualify for the marital deduction and then the assets would be removed from U.S. soil by the alien spouse, ultimately putting those assets out of Uncle Sam’s long reach.

However, there is an exception to the rule. A surviving spouse who is not a U.S. citizen can take the unlimited marital deduction providing a qualified domestic trust (QDOT) has been established for him or her. If the various technical requirements for qualifying as a QDOT are met, the marital deduction is allowed for assets that pass to the trust at the death of the first spouse.

Life insurance issued by a U.S. life insurer and owned by a resident or NRA can be a tax-efficient means of providing liquidity to pay estate taxes. That’s especially true for NRAs because life insurance is specifically excluded from their taxable estates. Life insurance is not considered property situated in the United States.

All of this means that NRAs can own life insurance on their lives to generate estate liquidity, accumulate tax-deferred cash values, maintain access to those cash values and provide a death benefit for their families that is exempt from both U.S. income and estate taxes. Unlike American citizens, NRAs do not have to take the extra planning step or pay the extra cost of creating an irrevocable life insurance trust in order for the life insurance policy’s death benefit proceeds to be excluded from their taxable estate.

Although life insurance is included in the estate of a resident alien, the same planning techniques that help U.S. citizens pass wealth to their loved ones can be used for resident aliens as well.

Gift splitting between spouses is not available unless both spouses are U.S. citizens or resident aliens.

Ensuring the American dream
Unfortunately, foreign nationals can find it difficult to pass their success on to the next generation. Without proper financial planning, their years of hard work, sacrifice and wealth accumulation can be squandered. With your expertise, you can help foreign nationals living in your community keep the American dream alive for their families.

Donna Scalaro, J.D., is an advanced sales consultant for Hartford Life Insurance Co., a subsidiary of The Hartford Financial Services Group (NYSE: HIG). She can be reached at


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