When a spouse dies, the other spouse often inherits property automatically, including pension funds. However, if the surviving spouse is not a U.S. citizen, the inheritance of property is more complicated. Non-citizens can still inherit spouses' pension funds, but they may have to pay estate taxes on these inheritances unless they become citizens.
If a U.S. citizen is married to a non-citizen, the non-citizen must pay estate taxes on any inheritance he or she gets from the estate after the citizen's death. Conversely, married persons who are both U.S. citizens have the right of tax-free transfer of assets after a spouse dies. In some cases, the executor of the estate can petition the IRS to exempt retirement benefits from estate tax.
If the permanent resident becomes a citizen between the time her spouse dies and the time she inherits a pension fund, she will not have to pay taxes on the pension fund. If the spouse becomes a citizen after receiving the pension fund, she must pay estate taxes on any portion of the fund she received before she became a citizen, but will not have to pay estate taxes on funds she receives after she becomes a citizen.
Estate Tax Exemption
If the citizen's estate is worth less than the federal estate tax exemption, the spouse will not have to pay estate tax on assets, including retirement accounts, regardless of whether the spouse is a citizen or not. In 2011, the federal estate tax exemption was $5 million. Thus, if the estate is worth less than $5 million in total, the spouse won't have to worry about estate taxes.
Since non-citizens cannot get marital exemptions on estate taxes, the citizen spouse may choose to give a portion of his pension to the non-citizen every year while he is still alive. As long as he doesn't exceed the gift tax exemption amount, the citizen can do this without paying additional taxes. In 2011, the gift tax exemption amount was $133,000 per year.
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