It goes without saying that the laws governing the U.S. estate and gift tax system are complex and the taxes and penalties for mistakes are high. For a non-U.S. citizen (“non-citizen”) the U.S. estate and gift tax system is even more onerous and requires a much higher degree of awareness.
Of course the good news for U.S. citizens and non-citizen residents is that the applicable exemption is now $5 million. However, for a nonresident non-citizen (“nonresident alien” or “NRA”) the applicable exemption continues to be limited to $60,000. Thus, estate tax is due when a nonresident alien’s estate transfers U.S. situs assets above $60,000. This article provides a brief overview of the U.S. estate and gift tax laws as they impact our international clients who are nonresident aliens.
Unlike U.S citizens and residents, who are subject to estate and gift tax on their worldwide assets, nonresident aliens are subject to estate and gift tax only on assets that are considered U.S. situs property. However, it should come as no surprise that the situs rules are complex and different for gift tax and estate tax purposes. Advisors need to review the possibility and impact of existing tax treaties between the U.S. and other countries.
The first question for non-citizen clients (and their advisors) is to determine if the client is in fact a “nonresident”.
While for gift tax purposes, an individual is a “resident” if that person is “domiciled” in the U.S. at the time of the transfer, for estate tax purposes, a person is a “resident decedent” if the person is “domiciled” in the U.S. at the time of his or her death.
The U.S. Treasury Regulations defines “domicile” as follows:
“A person acquires a domicile in a place by living there, for even a brief period of time, with no definite present intention of later removing therefrom. Residence without the requisite intention to remain indefinitely will not suffice to constitute domicile, nor will intention to change domicile effect such a change unless accompanied by actual removal.”
In practice, domicile is a factual issue based on various factors, none of which are determinative. Some of the factors include:
- Length of time spent in the U.S and abroad;
- Size, cost and nature of the decedent’s houses or other residence – whether owned or rented;
- Location of the decedent’s family and close friends;
- Visa status;
- Location of decedent’s business interests and voting records;
- Declaration of residence in one’s wills, trusts, deeds, etc.
SUMMARY OF GIFT TAX RULES FOR NON-CITIZENS
Generally, nonresident aliens are subject to gift tax only on transfers of real or tangible personal property situated in the U.S. Thus, gifts of intangible property by a nonresident alien are generally exempt from gift tax. Property that is not considered intangible property (thus subject to gift tax) at the time of the transfer includes: (i) real property within the U.S., (ii) tangible personal property situated within the U.S. and (iii) U.S or foreign currency or cash within the U.S. As mentioned earlier, it is important to note that situs rules differ between the gift and estate tax laws. For example, a gift of cash on deposit in a U.S bank is tangible personal property for gift tax purposes but not for estate tax purposes. Furthermore, the gift of stock in a domestic corporation is an intangible asset exempt from gift tax, but that same stock if transferred at death (by will or intestacy) would be subject to estate tax.
In addition, while nonresident aliens are entitled to annual exclusion for gifts of up to $13,000 per donee, unlike U.S. citizens, nonresident aliens cannot “split gifts” with their spouse (and thus effectively double their annual gifts) and are ineligible for the $5 million unified lifetime exemption. To add insult to injury, no matter how much nonresident aliens love their spouses, there is no unlimited marital deduction for gift tax purpose for property flowing to a non-citizen spouse. In fact, such gifts are currently capped at $134,000, with a slight boost to $136,000 starting in 2011, indexed for inflation.
SUMMARY OF ESTATE TAX RULES FOR NON-CITIZENS
As before 2010, beginning in 2011, nonresident aliens are subject to estate tax on value of all U.S. situs property in excess of $60,000. While an unlimited marital deduction is available when a non-citizen leaves U.S. property to a U.S. citizen surviving spouse, when the assets are transferred to a non-citizen the same unlimited marital deduction is available only if the property is transferred into a “qualified domestic trust” (“QDOT”) for the benefit of the non-citizen.
As mentioned earlier, determining whether an asset is deemed to be U.S. situs property is not always clear, and these rules in particular and the estate and gift tax laws in general are complex and different for estate and gift tax purposes. Given the technical nature of these laws, we urge you to consult your SGR Trusts & Estates attorney.