Finances for Non-American Spouses

Everyone is familiar with the age-old scenario - an American moves to the UK for work or study for a few years, ends up meeting and falling in love with a UK national and never leaves. For most people, when it comes to love and marriage, the financial implications of being a multi-national family are not at the forefront of their minds. Despite this, there are some very important financial considerations that a US Citizen should be aware of when their spouse is not American.

Being a multi-national family can provide some great planning advantages alongside the traditional pitfalls of being an American abroad. The traditional pitfalls of being an American abroad are well known – for example the importance of avoiding Passing Foreign Investment Companies (PFICs) and Offshore Income Gains (OIGs), hidden foreign currency gains on non-USD denominated debt, managing non-remittable capital and foreign tax credits and making sure foreign informational reporting is properly completed each year.

Alongside the pitfalls, it is important to remember that opportunities often abound of which multi-national families can take advantage, for example in choosing to own certain assets in either spouse's name to optimise the tax implications for either US or UK purposes. For instance, the non-US spouse is able to consider the use of UK tax-advantaged accounts and asset ownership structures in the UK that generally are less beneficial or more difficult to navigate for a US Citizen, such as Individual Saving Accounts (ISAs) and Enterprise Investment Schemes (EIS), to name a few common examples in addition to a broader investment universe. Alongside this, the US spouse has the opportunity to consider the use of US tax-efficient vehicles such as Traditional and Roth Individual Retirement Accounts (IRAs) among others as well as generally cheaper investment products (which can also help to avoid Passive Foreign Investment Company (PFIC) and foreign informational reporting issues). US people may even have the ability to custody UK pensions on a US platform which for some can be advantageous for annual reporting and long-term planning purposes should they potentially be planning to retire in the US.

In order to take advantage of some of those planning opportunities, you must also be aware of how the US gift and estate tax rules work. The US imposes a tax on transfers of property both during a person’s life and at death. A US Citizen has a current lifetime allowance of $12.06 million (2022) before being subject to estate or gift tax. Gifts given during one’s lifetime above the annual allowance will reduce an individual’s lifetime allowance. NB under current law the lifetime allowance is set to reduce back to an inflation indexed $5 million threshold at the end of 2025. For individuals who have estates in excess of this reduced threshold, consideration should be given to using the current allowances before they sunset.

Where a married couple are both US citizens they have the ability to pass assets freely between them without any implications. This is called the unlimited marital deduction. However when one spouse is not a US citizen, the unlimited marital deduction does not apply. During one’s lifetime, gifts to a non-US citizen spouse carries a current annual exclusion of $164,000 (2022) before reducing the lifetime allowance. By taking advantage of the annual exclusion, one could gradually transfer wealth out of the US and, given a particular set of facts and circumstances, look at ways to optimise the structure of the family wealth without incurring gift tax and at the same time reduce the eventual taxable estate from a US perspective.

If proper planning is not put in place, any amount of an estate that is above the allowable lifetime exemption, will likely be subject to federal estate tax. Other than a surviving spouse making the decision to become a US citizen, which has other implications that must be considered, one could consider the option of setting up a qualified domestic trust (also known as a QDOT). The QDOT could be created as part of a will and if the assets inherited by the non-US citizen spouse go into the QDOT any federal estate tax payable is deferred until the money is either distributed from the QDOT or the second spouse passes away. At that point, the deferred estate tax will be paid.

While being a multi-national family can present some challenges, through advance planning one could avoid paying unnecessary costs and understand how to take advantage of some of the valuable opportunities that often present themselves. It is beneficial to plan early and speak with a tax adviser and financial adviser knowledgeable of US and UK planning issues to ensure you are optimising your individual situation.

Andrea Solana is Partner, Head of Advanced Planning, at MASECO Private Wealth.

For full details go to masecoprivatewealth.com

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