Americans and their businesses are changing. More more often than not, we are encountering clients with dealings both inside and outside the United States. If you fall into this category (consider international ties to family, business, and/or real property), several issues in the transfer tax arena may arise. What is transfer tax? Quite simply, it is a tax on the passing of property from one person (or entity) to another. In the United States, transfer tax includes estate, gift, and generation-skipping transfer (GST) taxes. And if you have international ties, there are some basic (and sadly often overlooked) questions you need to address with your CPA. Here are the top five:
1. Are you a U.S. citizen? If not, are you currently living here with no intention of leaving?
An individual is subject to transfer tax if he or she is a U.S. citizen or is domiciled in the U.S. at the time of the transfer (i.e., at death for estate tax purposes or at the time of the gift for gift tax purposes). Being domiciled is defined as a person living in the U.S., even for a brief time, with no definite present intention of moving. A person’s employment history, property ownership, and family ties will help determine whether he or she is truly domiciled in the United States. This facts-and-circumstances type of test stands in stark contrast to the legal residency status required for income tax purposes. It is therefore important for you to discuss your current situation and future plans with your CPA as you consider transfer tax.
2. If you are a nonresident for transfer tax purposes, do you plan to acquire domestic property in the future?
Residents are subject to U.S. transfer taxes on their worldwide assets. Nonresidents are subject to transfer taxes based on the “situs” -- the place -- of their assets. U.S.-sitused assets are real property and tangible personal property located in the United States.
Estate and gift tax exemptions are much smaller for nonresidents than residents. The exemption for residents is currently a unified amount of $5,430,000 for estate and gift taxes, with amounts in excess taxed at 40%. For nonresidents, the estate tax is assessed at the same 40% rate, but with only a $60,000 exemption. For gift tax purposes, there is only the $14,000 annual exclusion for gifts of a present interest. Because of the modest exemptions, preparation is critical for nonresidents seeking to acquire U.S.-sitused property. A competent CPA can analyze whether the asset can be acquired in a form of ownership that prevents application of transfer taxes (e.g., a foreign corporation).
3. If you are a resident for transfer tax purposes, are your parents residents? If not, do they plan on transferring significant wealth to you?
Many clients who are recently immigrated have parents still living overseas with a significant amount of wealth they intend to transfer to their children. Nonresidents are not subject to U.S. transfer taxes unless the assets are in the U.S. (see above). Therefore, a nonresident parent who owns considerable property outside the U.S. could transfer those assets to the child with no transfer tax implications. However, if these assets are transferred directly to the child, then, when the child dies, they will be subject to U.S. transfer taxes. Avoiding this can be as simple as establishing a trust for the child’s benefit with the parents’ non-U.S. assets, because the trust would not be subject to transfer tax. Again, a qualified CPA can help determine the best course of action.
4. Do you have a noncitizen spouse?
A host of transfer tax issues are present in marriages between a U.S. citizen and a non-U.S. citizen (regardless of domiciliary) that are not present in marriages between U.S. citizens. For example, there is no marital deduction for transfers between U.S. citizen and noncitizen spouses. For estate tax purposes, all of the assets in the resident spouse’s estate that pass to the noncitizen spouse will be taxable. In addition, the full value of assets that are jointly held with the noncitizen spouse is included in the resident spouse’s estate if the resident spouse dies first and contributed all of the assets to the jointly held property. Again, a competent CPA is your best defense against steep transfer taxes in this case. Several options exist that will allow assets to pass to the spouse without penalty.
5. Are your parents or any other family members planning to immigrate to the U.S.?
Planning is critical here because transfer taxes do not apply to a significant amount of those family members’ assets. People planning to immigrate to the United States should consider making large gifts to family members in trust before they establish domicile and are therefore subject to U.S. transfer taxes. The irrevocable trust should be established in a jurisdiction that has an “asset protection” statute and name the family members as discretionary beneficiaries of the trust so that they do not lose access to the assets.
Navigating the waters of transfer taxes can be tricky when international ties are present. Don’t go it alone.
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