The united states has a gift and estate tax with rates as high as 40 percent. U.S. citizens and foreign persons domiciled in the U.S. are subject to the U.S. gift and estate tax on their worldwide gifts and, at death, on their worldwide estate. Even foreign persons not domiciled here may be subject to the U.S. estate tax if they own U.S. assets such as real estate and stocks.
Tax advisors servicing a foreign person moving here -- even if only for a short two- or three-year stint-must be aware of the basics of the U.S. gift and estate tax because they are quite complex and can be challenging during the planning process.
A foreign person is considered domiciled in the U.S. if they are physically present and have the intent to remain in the country indefinitely. In theory, a person can attain U.S. domicile the instant they step off a jet plane onto U.S. soil. Alternatively, a foreign individual could spend decades here and arguably not have the requisite intent to be considered domiciled in the U.S. An executive moving to the U.S. on a short-term assignment of three to five years under an appropriate work visa would generally not be considered to be domiciled in the U.S., since the expectation is that they would return "home" after completion of the assignment. If, however, the executive extends the term of U.S. residency or acquires a so-called "green card," the factors would probably swing in favor of the executive attaining U.S. domicile.
Factors that the Internal Revenue Service and the courts typically look at during their consideration and review are visa status, owning or renting a home, presence of family members, club memberships, statements in legal documents such as wills and/or trusts concerning domicile status, location of cemetery plots, location of physicians, and severing ties to the "home" country.
DOMICILED ... AND TAXABLE
If a foreign person is domiciled in the U.S., they will be subject to gift tax on their worldwide gifts. Additionally, upon death, their worldwide estate would be subject to U.S. estate tax. A domiciled individual will also have the same exemption amount as a U.S. citizen. The exemption amount is $5 million, indexed for inflation. During 2013, after inflation adjustments, the exemption amount is $5,250,000. Given the size of this exemption amount, many foreign persons need not concern themselves with the U.S. gift or estate tax. However, keep in mind that many U.S. states do impose an estate or inheritance tax separate from the federal tax. These state death taxes typically have a significantly lower exemption amount. For example, if a foreign person lived in or owned New York real estate, the exemption would only be $1 million.
A foreigner is at a disadvantage under the U.S. gift and estate tax system because, unlike U.S. citizens, gifts or bequests to foreign spouses are not eligible for the unlimited U.S. marital deduction. For example, a U.S. citizen could gift $10 million to a U.S. citizen spouse without any concern of using up some of their exemption or paying any tax. If, however, a U.S. citizen or foreign person makes gifts to a non-citizen spouse, those gifts will constitute taxable gifts to the extent that they exceed the gift tax annual exclusion amount.
In 2013, the annual gift tax exclusion amount is $14,000 per non-spouse donee. For gifts to non-citizen spouses, the annual exclusion is increased to $143,000. A gift to a non-citizen spouse of $10,000,000 would result in a taxable gift of $9,857,000 and would use up the $5,250,000 exemption and result in gift tax of $2,100,000.
Although unavailable for gift tax purposes, bequests to a non-U.S. citizen spouse can qualify for the U.S. unlimited marital deduction for estate tax purposes if the bequest is to a qualified domestic trust, or QDOT. In effect, if the deceased spouse's assets are placed into a QDOT, the U.S. estate tax will be deferred generally until the death of the surviving spouse, or sooner if the surviving spouse receives distribution of principal from the QDOT. Often the QDOT is established pursuant to the terms of the decedent's last will, but it is also possible for the surviving spouse to fund the QDOT subject to certain time constraints. The QDOT has to have a U.S. person serving as trustee, be solely for the benefit of the surviving spouse and require the distribution of income to the surviving spouse on at least an annual basis. In addition, the executor of the deceased spouse's estate must make an election to qualify the trust as a QDOT trust.
TIMING THE TAX
The best time for a foreigner intending to permanently move to the U.S. to do estate planning is prior to obtaining domicile in the country. If gift tax issues can be avoided in the "home" country because the country has no gift tax or the person has departed from the country for purposes of application of its gift tax, then they should consider making gifts prior to arrival here -- which would be determined during the planning stage.
Additionally, during the planning stage, the foreign person can decide whether it is appropriate to consider making gifts to either an onshore or offshore irrevocable trust for the benefit of their spouse, descendants and other family members. It may even be possible for the foreign person contributing the assets to the trust to also be a discretionary beneficiary. If the trust is designed correctly, the assets held within the trust should pass free of U.S. gift tax and estate tax to the discretionary beneficiaries in accordance with the terms of the trust. The foreign person should retain ownership of sufficient assets on the outside of the trust to maintain their standard of living without having to access the assets of the trust.
Foreign persons moving to the U.S. on a transitory basis will most likely not be considered to be domiciled in the country. As such, they will only be subject to the federal gift tax if they transfer tangible personal property located within the country. There is no exemption from the gift tax except for the annual gift tax exclusion amount of $14,000 per donee. Examples of gifts that would be subject to the gift tax include gifts of U.S. real estate, gifts of cash, art, automobiles, jewelry and valuable tangible personal property located in the country.
A non-domiciled foreign person living within or outside of the U.S. will only be subject to the federal estate tax to the extent of U.S. situs assets that exceed the exemption amount of $60,000. Examples of U.S. situs assets include U.S. stocks and U.S. real estate. To not be subject to the estate tax, a foreign person may wish to hold title to those assets within a foreign corporate entity. Another option available to a foreign person is to simply acquire a life insurance policy to cover the U.S. estate tax costs attributable to the U.S. situs assets.
Because of the significantly reduced exemption amounts available for a foreign person not domiciled in the U.S., the IRS may argue that the foreign person is not domiciled here. When consulting with an advisor on estate planning matters, it is always essential that foreigners make it clear to the advisor that they are not U.S. citizens. Two big components of not making common mistakes and avoiding pitfalls are for the advisor to ask the right questions and for the person to provide as much information as they have on assets and the international move.
John Nuckolls is the national director of private client services at
