Parnell, 42, and Schueller, a 44-year-old German citizen, are both computational biologists who met at a scientific conference and have since settled in Cambridge, Mass. While consulting a financial advisor in May 2005, they learned that Schueller’s citizenship posed a serious hurdle to their estate planning, one faced by most international couples: Schueller does not qualify for the unlimited marital deduction, taken for granted by couples who both have U.S. citizenship, that would allow Parnell to transfer his assets to her without incurring estate taxes. Rather than leave her exposed to a potentially enormous estate tax liability, the couple have been working with their advisors and lawyers to establish trusts to shield their assets.

TOP VIEW: Many foreign-born individuals are surprised to discover that their nationality does not exclude them from the obligations of U.S. income and estate taxes. In particular, a foreign individual who marries a U.S. citizen is not covered by the marital exemption to estate taxes. These couples can employ tools such as trusts and life insurance to shield their estates, but they must be particularly careful to preserve the flexibility to decide whether to stay in the United States or to return home if their spouse dies.

"That was surprising–and somewhat disappointing–to learn it’s as complicated as it is," Parnell notes. "But nonetheless, in typical U.S. fashion, there’s a way to reach a satisfying solution. It just may involve more paperwork and fees than we would desire."

Many foreign-born individuals discover to their chagrin that their nationality does not exclude them from the obligations of U.S. income and estate taxes. For these individuals, the tax dilemmas can be particularly confusing, frustrating and expensive–even when the foreigner marries a U.S. citizen. Along with the estate tax exposure, foreigners residing in the United States, including those married to U.S. citizens, must wrestle with the fact that they must pay taxes on their worldwide income. The IRS decides whether an individual is a resident by examining the extent and nature of the personal and professional relationships to the United States.

Taxing Efforts
Like Parnell and Schueller, many international couples are surprised at the sheer size of their potential estate tax liability. After the $2 million estate tax exemption, alien spouses of U.S. citizens may face taxes of up to 46 percent on the remainder of an estate–including assets held overseas. (The U.S. citizens in international couples still benefit from the marital exemption.)

When neither spouse is a citizen, the tax consequences of poor planning can be extreme. In these cases, the widow or widower may face the ire of the IRS as well as the wrath of U.S. Citizenship and Immigration Services. In such cases, estate planning escalates into crisis management.

"In typical U.S. fashion, there’s a way to reach a satisfying solution. It just may involve more paperwork and fees than we would desire."

Such a scenario played out for one of Peter Calfee’s clients several years ago. Calfee, a certified financial planner and president of Cleveland-based Calfee Financial Advisors, had unsuccessfully urged his clients–German citizens who had lived in the U.S. for several years–to develop an estate plan, but the husband had resisted Calfee’s suggestions, assuming he would be returning to Germany.

Soon after the man’s death, his widow received a deportation notice. Because her husband held U.S. working papers only in his name, the government gave the widow two weeks to leave the country. "It was a nightmare," Calfee recalls. "Unfortunately he did not listen to my repeated requests to get documents in order." However, the woman applied for, and eventually gained, U.S. citizenship, which not only enabled her to remain in the country, but to also inherit her husband’s estate free of heavy taxes.

For many like Calfee’s client, gaining U.S. citizenship may be the best solution; widows and widowers of U.S. citizens can apply for it for up to nine months after a spouse’s death. But while this may be the most effective option, not everyone is willing to repudiate their home country for the sake of tax efficiency. For them, planners suggest using less emotionally charged strategies, such as gifting assets over time; establishing vehicles such as the qualified domestic trust (QDOT), which shields assets from estate taxes; and purchasing life insurance to fund potential estate tax levies.