It is essential for people with multiple citizenship and/or residency to understand that the timing and manner of wealth ownership, transfers and growth can affect their tax burdens.
Questions to ask:
Is a donor a U.S. citizen or domiciled in the U.S.?
If either are true, all gifts made and assets owned worldwide at death are subject to U.S. transfer tax in the absence of a relevant tax treaty. In addition, even if the individual has no connection to the U.S. but passes away with certain types of property located in the U.S. the estate tax applies to the U.S. assets regardless of citizenship or residency unless a treaty exemption applies.
What creates U.S domicile for estate and gift purposes?
According to the IRS, a person can establish domicile by living in a place for even a brief period with no definite, present intention of moving. However this test requires a facts and circumstances analysis which includes factors such as citizenship in another country, location of investment assets, driver’s registration, bank accounts, homes etc. Domicile is separate from Income Tax Residency therefore it is possible to acquire income tax residency without becoming domiciled in the U.S. for estate and gift tax purposes.
If beneficiaries of a gift or bequest are located in the U.S. and the donor is not a U.S. citizen or with a U.S. domicile, must U.S. transfer taxes be paid?
In almost all cases the answer depends on the location of the transferred assets, not the location of the beneficiary. Gifts of real property located in the U.S. would be a type of asset subject to the U.S. transfer tax even for a nonresident. Gifts of intangibles, including stock, to a beneficiaries located in the U.S. from a nonresident would not be subject to U.S. transfer tax. Nonresident aliens who make gifts subject to U.S. transfer tax are not eligible for the unified credit either. The $13,000 exclusion is allowed thus a nonresident alien is only allowed the equivalent of $60,000 lifetime exclusion compared to the $5.12 million in 2012 for U.S. citizens and domiciled residents.
What are the benefits of an estate treaty?
Unless an estate/inheritance or gift tax treaty applies, lifetime transfers and all assets owned at death by a person domiciled in the U.S. who is a citizen of another country are subject to U.S. taxes and his or her country’s tax. Currently 16 countries have estate tax treaties or a combined estate and gift tax treaty with the U.S. Some of these include, France, Germany Ireland, Italy, Japan and the United Kingdom. The general purpose of these treaties is to avoid double taxation. However each treaty is different and can apply their provisions differently regarding the situs of property and the domicile of the taxpayer. In addition, there is a limit to the use of a treaty for preferential treatment if a person has lived for a significant period of time in the U.S. Longer term residents will not be eligible for relief under a treaty.
What are the implications of transfers to a Non U.S. Citizen spouse?
Even if U.S. domicile has been established and the taxpayer is allowed the full unified credit the tax law does not allow the unlimited marital deduction for spouses who are not U.S. citizens, with a few exceptions. So in addition to potentially all assets of a U.S. domiciled foreign person being subjected to U.S. estate tax, if there is no applicable estate tax treaty, the taxpayer cannot benefit from a full marital deduction unless the spouse is a U.S. citizen. Considering the lower tax rates in many countries such as Brazil, China, and Venezuela or even where there are no estate taxes, establishing domicile in the U.S. can be costly.
Other considerations include:
Many European Union countries have a forced heirship system which must be considered. This may require specific beneficiaries as a matter of law and could cause U.S. estate plans for foreign citizens to be problematic.
Many continental European countries along with many Latin American countries follow a community law system. International treatment of community property can bring up a variety of conflicts of laws too.
As a result of the possibly significant transfer tax issues that a global taxpayer could face, it is important to seek professional help from attorneys and CPA’s who are knowledgeable in this area and who can consult with professionals from the initial country of citizenship.
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