Estate Planning for Non-U.S. Citizens: Your Domicile

If you’ve moved to the U.S. from another country, or if you live outside the U.S. but own U.S. property, one of the most important things to know is what country you are domiciled in.

While the term domicile isn’t widely understood—and many people have never even heard of it—it can have a dramatic effect on what happens when you die, from who will end up with your assets to how much your heirs will have to pay in taxes. Indeed, it could mean the difference between no estate taxes and many millions of dollars in estate taxes.

International estate planning issues can be extremely complex. However, they all begin with one question: What is the country of your domicile? 

The term “domicile” refers to the place where you live with no definite intention of leaving. In the U.S., your domicile usually depends on the type of visa you have. However, a court may look beyond your visa to factors like where you have your principal residence, where you work and where you spend most of your time, among other factors.

Are You Domiciled in the U.S.?

If you are a green card holder, the terms of your visa require that you intend to remain in the U.S. permanently, so, in most cases, a court will find that you are domiciled here. On the other hand, if you live outside the U.S. and don’t have U.S. citizenship or a green card, then you are likely not domiciled here. 

If you arrived in the U.S. on a temporary work visa, that visa is likely conditional upon your intention to return to your home country, so you presumably don’t intend to remain here. A handful of temporary visas allow what is known as “dual intent,” meaning the visa holder can relocate for the temporary term of the visa, while also pursuing permanent residence. If you have a dual-intent visa, there is no presumption of domicile. 

It is important to remember that domicile only matters at the time of your death. You could have lived in the U.S. for 15 years on an H1-B visa and only decided to apply for a green card a week before your death. Because your decision to apply for a green card evidences an intent to remain in the U.S., you would be domiciled in the U.S. at the time of your death. (For related reading, see: The H1-B Visa Issue Explained.)

Why Is Domicile So Important?

Domicile is important for three reasons.

  1. It determines the place where your estate will be administered.
  2. It determines the estate or inheritance laws that will apply.
  3. It determines what estate tax rules will apply to your estate; the rules that apply to individuals domiciled in the U.S. and those that apply to individuals domiciled outside the U.S. are dramatically different.

Location of Estate Administration

When you die, a friend or close family member (or other person you have chosen in your will) must begin the process of transferring your assets from your name to the name of your heirs. In the U.S., this is called probate or estate administration, and it is supervised by a local court. (For related reading, see: Do Retirement Accounts Go Through Probate?)

The court that oversees the process is the court located in the county where you were domiciled. (The concept of domicile doesn't just apply in the international realm.) The person who administers your estate will have to file a number of documents with that court, which usually involves hiring a lawyer. This can be challenging for family members who live outside the U.S. and may not even speak English.

Who Inherits Your Things

Certain laws determine who will inherit your assets, and—as you might have guessed—the laws that apply depend on where you were domiciled at the time of your death. In the U.S. the distribution of your assets is made pursuant to the terms of your will, if you executed one. If you don’t have a will when you die, the state laws (of the state in which you were domiciled) determine who inherits your assets. (For related reading, see: An Estate Planning Must: Update Your Beneficiaries.)

How Much Your Heirs Will Pay in Taxes

The U.S. government imposes estate taxes both on individuals domiciled in the U.S. and on those domiciled elsewhere. However, the estate tax rules that apply if you are domiciled in the U.S. differ substantially from the rules that apply if you are domiciled elsewhere.

For U.S. citizens and anyone else domiciled in the U.S., the U.S. government imposes an estate tax based on the value of all your worldwide assets, no matter where they are located. The estate tax rate is quite high, at 40%. However, the effect of this high rate is offset by an exemption from the tax of approximately $5.5 million—meaning your heirs will owe estate taxes only if the value of your estate exceeds $5.5 million. (For related reading, see: 8 States With Estate Taxes.)

The estate tax rules for individuals who are not domiciled in the U.S. can easily prove a trap for the unwary. If you are domiciled outside the U.S., the estate tax is based only on the value of U.S. assets you own at the time of your death. Assets held outside the U.S. are not counted. That’s the good news. 

The bad news is that the exemption amount is a mere $60,000; the value of any U.S. assets exceeding $60,000 is subject to a tax rate of 40%. If you purchase an apartment or house in the U.S. to rent out or use for vacation, your heirs could end up with a very hefty tax bill when you die.

Conclusion

If you live in the U.S. or own assets here and you are not a U.S. citizen, your loved ones can end up with a legal mess and huge tax bill if you do not carefully plan your estate, beginning with determining your domicile. Be sure to consult an estate planning attorney experienced in international planning to minimize taxes and protect your loved ones. (For related reading, see: Do You Need an Estate Planning Lawyer?)