Love is one of the top reasons that Americans move abroad, and it’s no surprise that many expats find themselves navigating the complexities of cross-border financial planning when married to a non-US citizen. Living overseas as an American with a non-US citizen spouse can introduce additional considerations relating to asset ownership, tax planning, and estate planning. These financial decisions are not only complex but can also impact your family’s long-term financial well-being and security.
In this article, we’ll explore key aspects that Americans with foreign spouses should consider to manage their finances effectively while living in Europe.
Your foreign spouse and US taxes
Whether or not your foreign spouse living abroad needs to file US taxes depends on two factors: whether they hold a US Green Card and whether you’ve opted to file jointly on your US tax return. If they hold a Green Card, they are required to file a US tax return annually for as long as they retain it. This applies even if they live and work entirely outside the US. They can however renounce their Green Card to avoid US taxation on their worldwide income.
If your foreign spouse does not have a Green Card, the IRS generally considers them a non-resident alien, meaning they typically do not need to file a US tax return on their own income. However, if you, as a US citizen, choose to file a joint return, this subjects your spouse to US taxes on their global income, even though they may not need to file independently. Filing jointly can sometimes be beneficial for added allowances, such as if your spouse has no current or future income, but it also brings additional obligations, including potential information-reporting requirements on their non-US registered assets.
Whose name should your assets be registered in?
When considering the ownership of assets, it’s always best to speak to a qualified financial planner and tax advisor. For example, it may be strategic to register certain holdings in the name of your foreign spouse or jointly, particularly if they are outside the US tax system. For example, if you and your non-US spouse co-own a property or stocks, only half of any capital gains or income derived from them will be subject to US income or capital gains taxes.
Transferring assets solely to your foreign spouse could simplify your US tax reporting requirements and reduce potential tax liabilities. US citizens often face complex reporting obligations for foreign-registered assets like trusts, companies, or mutual funds. However, your reporting requirements could be significantly less burdensome if these assets are held solely in your foreign spouse’s name.
The way you allocate your investment assets has implications for your tax responsibilities in your country of residence too, so it’s important to seek advice from financial planning and tax professional who specialist in cross border individuals and who are familiar with the tax treaty between the US and the country where you live.
They can help ensure that your asset structure effectively minimizes your tax liabilities while remaining compliant with both US and foreign laws. Tailoring your asset allocation to your unique circumstances, taking into account your financial goals and life plans too, is best way to achieving the optimal outcome.
Estate planning for US expats with a foreign spouse
For families with both US and non-US members, estate planning can be intricate. Typically, you will need to have wills in both the US and your country of residence, which should be established with the guidance of a specialist in cross-border estate planning who is familiar with the laws in both jurisdictions.
When an American citizen has a foreign spouse who is not a US taxpayer, they lose the benefit of the unlimited spousal exemption for estate transfers. This situation can lead to potential US estate tax liabilities.
Currently, there is a lifetime estate tax exemption of approximately $13.61 million in 2024, but this may decrease to $6 million in 2025 unless the new administration extends it. However, non-US citizens don’t benefit from the estate tax exemption but instead receive a flat $60,000 exemption.
As such, to reduce US estate taxes for non-US citizens spouses, three estate planning strategies to consider are:
- Gifting Assets: One option is to gift assets to your non-resident foreign spouse. In 2024, you can gift up to $185,000 annually tax-free, and over several years these gifts can accumulate to a substantial amount, effectively reducing the taxable estate.
- Qualified Domestic Trust (QDOT): Another approach is to establish a QDOT, which allows you to transfer assets into a US trust for your spouse’s benefit. The income generated from this trust can be used to cover living expenses, including healthcare and maintenance. However, it’s important to note that a QDOT defers estate tax liability only until the spouse’s passing, which may not always be the most advantageous arrangement.
- Seek Citizenship: If the non-US citizen spouse obtains US citizenship before the federal estate tax return is due, they can qualify for the unlimited marital deduction, which allows them to inherit assets without incurring estate taxes. This would also ensure they receive the full estate tax exemption upon their death, significantly improving the financial position of the couple. However, it would also mean they are subject to US taxes on their global income, as well as US asset reporting rules.
Note also that every country has different rules in terms of local inheritance and estate taxes that need to be considered as part of your overall estate plan.
Every couple’s situation is slightly different, and your expat financial planner will convene the necessary experts to ensure you plan in an optimal way given your circumstances to protect your love ones.
Final thoughts
If you are one of the many Americans living overseas with a foreign spouse, collaborating with an expat specialist financial advisor along with a cross-border attorney and expat tax professionals is the best way to optimize your tax strategy and navigate US reporting requirements.
If you have any questions about financial planning as an American living in the EU, get in touch.
This article is for informational purposes only; it is not intended to offer advice or guidance on legal, tax, or investment matters. Such advice can be given only with full understanding of a person’s specific situation.
