I work frequently with married couples of mixed nationality, when one spouse is not a US citizen and the other has such citizenship. Without due consideration to the US tax issues, spouses often hold title to bank accounts, brokerage accounts and real property as joint tenants with right of survivorship. Joint ownership often comes about even though only one spouse furnished all of the consideration for acquiring the asset or funding the financial account(s).
In my discussions with such clients it is clear to me that they don’t understand the US tax ramifications of holding property jointly. In the Middle East there may be forced inheritance rules in the local jurisdiction pursuant to Sharia Law. Sometimes, joint ownership is viewed by the couple as a possible way to avoid such rules, prompting the couple to hold assets jointly. You can learn more about the US tax ramifications of certain Sharia Laws in my article published in Tax Notes International “When Sharia and US Tax Law Collide,” available here.
As you will see in reading this post, the question whether US and non-US spouses should own property jointly is a question that should be carefully thought through. Here are a few things to consider:
- Special US gift and estate tax rules apply to the creation and severance of joint tenancies when one of the spouses is a non-US citizen. The rules are complicated and lead to confusion even among tax professionals. These rules, of course, are different than the general rules applicable to US citizen spouses and they often lead to unexpected and unintended tax consequences.
- How the parties have held assets is particularly important when one (or both) of the spouses is considering expatriation (i.e., giving up US citizenship or a green card held for a significant time). Is half the property counted for purposes of determining that spouse’s net worth test under the expatriation rules? Is all of it counted?
- US tax information reporting rules are implicated when assets are jointly-owned. The notorious FBAR (FinCEN Form 114) is a prime example. The entire value of the foreign account must be reported even if the US citizen owns only one-half. The foreign spouse usually does not appreciate the idea that the US government be provided with such information.
If you have not titled assets jointly with your non-US spouse, you should obtain proper advice before doing anything further. You must consider fully what this will mean because there are US Income tax, Gift tax and Estate tax ramifications of that decision. Similarly, if family gifts are being made to the couple, they should not be blindly made to the couple as joint owners.
I am happy to assist you in solving these thorny problems. Given my personal circumstances, I understand all too well the practical issues that arise when a couple lives abroad and only one individual is a US person.
Perhaps you have already made the choice and titled property jointly with a non-US spouse. You may now be faced with confusing tax issues, or wish to reconsider the ownership structure. I can help you in this case, too.
Here’s a Real Life Example
To put this in perspective, assume you have a married couple living in a non-community property jurisdiction outside the USA. Husband is a non-US citizen and wife is a US citizen; husband is employed and earns a hefty salary; wife is not employed and has no sources of income. Husband establishes a non-US joint bank or brokerage account and funds it with his salary. Later, he buys a rental property in a foreign country and titles it jointly with his US wife.
- Has he made a gift to his wife of half the account?
- Is husband liable for US Gift tax upon creation of the account?
- Must wife file any information returns with the IRS regarding the account?
- Must wife report half the investment earnings on her US tax returns?
- Same questions when husband funds the purchase of a rental property and titles the property jointly with his wife. Must he pay Gift Tax upon creation of the joint tenancy? Must wife file any information returns with the IRS about the property? Must wife pay US tax on half of the rental income? When the property is sold, must she report half the capital gains? What if the property is gifted to a third person, such as a child? Is Gift Tax owed by the wife upon gifting to the child?
- What about tax information reporting such as Form 8938 and FBAR, for example?
Address the Issues Before It’s Too Late
Perhaps you now have concerns that your US tax reporting has not been properly handled with regard to jointly owned assets. Perhaps you wish to reconsider how you have held assets with a non-US spouse. I can help you resolve these critical issues by examining all of the underlying facts surrounding your case including how the assets were titled, what the form of ownership means under the relevant local law, how the parties have historically dealt with the assets and income and so on.
Generally, unless the couple enjoys dealing with complicated US tax matters and filings, holding title jointly with a non-US citizen spouse is risky business!
The US Estate and Gift tax rules that apply with regard to jointly-owned property when one spouse is a non-US citizen differ greatly from the general rules that apply when both spouses are US citizens. In line with what appears to be the over-riding US tax principle that anything “foreign” (i.e., not American) is inherently suspect and should be discouraged (think, PFIC; think, FATCA), the Gift and Estate tax rules are often not favorable in such circumstances.
Don’t be caught out. Get the right advice from the right tax professional.
Follow-up blog posts will look closely at the US Gift Tax and Estate rules that apply to jointly-owned property when one spouse is a non-US citizen
Posted January 3, 2019
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