Estate Planning Involving Resident and Non-Resident Aliens
Navigating Estate, Gift and GST Tax Rules and Leveraging Estate and Lifetime Gifting Opportunities
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THURSDAY, SEPTEMBER 20, 2012
Presenting a live 90-minute webinar with interactive Q&A
Stephanie E. Heilborn, Partner, Fulbright & Jaworski, New York Monika Jain, Counsel, Phillips Nizer, New York
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Estate Planning for Resident
and Non-Resident Aliens
September 20, 2012
Stephanie E. Heilborn, Fulbright & Jaworski L.L.P.
(212 318 3207; [email protected])
Monika Jain, Phillips Nizer LLP
ESTATE, GIFT AND
GENERATION-SKIPPING TRANSFER TAX RULES
Rules Applicable to U.S. Residents
Non-U.S. citizens who are U.S. residents are subject to same transfer tax rules as U.S. citizens.
An individual is a U.S. resident for transfer tax purposes if he or she is domiciled in the U.S. Green card holders are
typically considered U.S. residents. (Note: residency for
transfer tax purposes is determined differently than residency for income tax purposes.)
A U.S. resident’s worldwide assets are subject to U.S. estate tax at the same rates that apply to U.S. citizens. U.S.
residents have the same exemptions as U.S. citizens: $5,120,000 this year for Federal estate, gift and GST tax purposes.
U.S. residents can also make $13,000 annual exclusion gifts, can elect to use portability and can split gifts.
Rules Applicable to Non-U.S.
Residents
An individual who is not a U.S. citizen or resident (domiciliary) is a non-U.S. resident.
Non-U.S. residents are subject to U.S. estate and gift taxation only on transfers of U.S. situs assets.
Intangibles, such as stock in a corporation, are generally not U.S. situs property for gift tax purposes, but are for estate tax purposes.
Non-U.S. residents have only a $60,000 exemption from the Federal estate tax, unless a treaty provides a greater exemption.
Rules Applicable to Non-U.S.
Residents (cont.)
Non-U.S
.
residents can make annual exclusion gifts, but if they are married to a non-U.S. resident, they cannot split gifts. Gifts to a spouse who is not a U.S. citizen (which
includes green card holders) can be made up to only $139,000 this year (indexed annually), without incurring any gift tax.
Transfers made to skip persons by non-U.S. residents are subject to GST tax only if the transfers are subject to gift or estate tax. Non-U.S. residents have a GST
exemption of $1,000,000.
Bilateral Estate and Gift Tax Treaties
Estate and gift tax treaties are designed to avoid double taxation of transfers when an individual is a citizen or resident of one country but owns, or is transferring, property located in another country.
A treaty generally will permit each country to tax property located within its borders, and also may allow an increased credit or exemption to a non-U.S. resident.
Therefore, when advising a U.S. citizen or resident who owns property in another country, or a
non-U.S. citizen/resident who owns property in the
U.S., it is important to determine whether a treaty applies to that transfer.
Bilateral Estate and Gift Tax Treaties
•
Australia•
Austria•
Belgium•
Canada•
Denmark•
Finland•
France•
Germany•
Greece•
Ireland•
Italy•
Japan•
Netherlands•
Norway•
South Africa•
Switzerland•
United Kingdom• The U.S. currently has estate and/or gift tax treaties with the following countries:
Bilateral Estate and Gift Tax Treaties
Special note: Some countries (two notable
examples being Canada and Australia) do not
have an estate or gift tax, but they do have a
deemed capital gains tax (“CGT”) on death.
Because CGT is not technically an estate tax,
a bilateral estate tax treaty may not provide
relief from double taxation.
The U.S.-Canada treaty generally takes care
of this problem by defining the estate tax to
include CGT, but the U.S.-Australia treaty
does not.
SAMPLE ESTATE PLANNING
SCENARIOS
Section II
U.S. Legal Permanent Resident (Green
Card Holder) Married to U.S. Citizen
Assume they live in the U.S.
Some questions to ask:
• How long has LPR had green card (to determine whether expatriation tax would apply if he/she gives up green
card)?
• Is the LPR a U.S. domiciliary for U.S. estate and gift tax purposes? If not, only $60,000 exemption unless treaty applies.
• Does LPR’s country of citizenship have an estate or gift tax? If so, does a treaty apply?
• Does LPR own property in country of citizenship?
• Do children have dual citizenship?
• Does LPR need Will in his/her home country, and does forced heirship apply to any assets?
U.S. Legal Permanent Resident (Green
Card Holder) Married to U.S. Citizen
Planning tips
•
U.S. citizen’s Will/Revocable Trust must containQDOT for non-citizen spouse; non-citizen spouse’s documents need not have QDOTs.
•
If LPR does not plan to become domiciliary and/or no treaty applies, avoid having U.S.-situs assets owned by LPR.•
Consider use of insurance to avoid QDOT restrictions. Note different definitions of domicile in somecountries—theoretically possible for LPR to be domiciled in U.S. for U.S. estate and gift tax purposes and also in home country (e.g., UK).
Both Spouses are Legal Permanent
Residents
Similar considerations as previous scenario.
Additional questions to ask:
•
Are spouses citizens of the same country?•
Why have they not become citizens—do they plan to leave the U.S.? Planning tips:
•
Both spouses’ documents must contain QDOTs.•
Strongly consider having Wills in home country,because greater chance they may leave U.S.
•
If they plan to leave U.S., consider having them give up green cards before they become subject toU.S. Non-Resident Alien Married to
U.S. Citizen
Assumes they live outside U.S.
Advantages:
• NRA can transfer unlimited non-U.S. assets to U.S. citizen spouse
and/or children without estate or gift tax.
• Ability to leave assets in trust for U.S. citizen spouse without restrictions
imposed by QTIP trust. Planning tips:
• Trusts created for U.S. citizen spouse probably should be U.S. trusts (or
build in flexibility to change situs from foreign to domestic, depending on whether remainder beneficiaries also are U.S. persons).
• NRA should be careful not to acquire any assets that could be subject to
U.S. estate tax (e.g., real estate).
• If NRA acquires U.S. situs assets in structure that avoids U.S. estate tax
(e.g., through foreign corporation), introduces complexity for U.S. citizen spouse—may need to explain importance of post-death elections on death of NRA.
U.S. Non-Resident Alien with U.S.
Assets
Treaty provisions are key.
Best to avoid any U.S.-situs assets in the first
place, but if not possible, acquire in a manner that will preclude U.S. estate tax.
The equivalent “string” provisions of Code sections 2035-2038 apply to trusts created by NRAs, so a revocable trust will not protect U.S.-situs assets from U.S. estate/gift taxation.
U.S. real estate is toughest to plan for because of FIRPTA. No way around paying some tax at some point; just tradeoffs between income tax and
POTENTIAL TROUBLE SPOTS
Section III
Choosing Executors/Trustees
U.S. citizens/residents should consider fiduciaries’ domiciles before appointing them as Executors or Trustees.
For NY testamentary fiduciary appointments, under SCPA §707, Letters may issue to an individual except to a
non-domiciliary alien unless he or she is serving with one or more co-fiduciaries, at least one of whom is a NY resident.
Appointments of non-domiciliary aliens will be made in the court’s discretion.
With respect to trusts (intervivos and testamentary), unless a majority of the Trustees are U.S persons (i.e., U.S. citizens or residents, or a domestic corporation) with the power to control “substantial decisions,” a trust will be deemed to be a “foreign trust” for U.S. income tax purposes.
Choosing Executors/Trustees (cont.)
For example: (i) Grantor (a U.S. person) creates a trust with Bob, a non-resident alien, as sole Trustee. Trust is a foreign trust. (ii) Grantor (a U.S. person) creates a trust with Bob, a non-resident alien, and Mary, a U.S.
citizen, as Trustees. Trust is a foreign trust. Trust needs one additional U.S. person as a Trustee to make the
trust a domestic trust.
Consequences of foreign trust status – Trustees must comply with annual filing requirements for the trust, such as filing Form 3520 and Form 3520-A. In addition,
income taxation of foreign trust will differ from taxation of domestic trust.
Children with Different Citizenships
Examples:
• Children with citizenships different than parents (e.g. parents are German citizens but children are U.S. citizens)
• Children in same family who have different citizenships (e.g., 2 of the 3 children were born in Mexico but the 3rd was born in the
United States)
Unless U.S. child gives up his/her citizenship upon reaching age of majority (e.g., accidental U.S. citizens), parents’ estate plan should assume there will be U.S. beneficiaries.
Children do not have much time after turning 18 to give up
citizenship without tax consequences, so parents and children should obtain advice sufficiently in advance.
If parents had children in U.S. and then moved away, and
children later return to U.S. to work or study, children will have to file back income tax returns and pay interest/penalties if
Covered Expatriates
A “covered expatriate” is any U.S. citizen who
relinquishes citizenship, and any long-term resident who terminates U.S. residency, if he/she
• (1) has average annual net income tax liability for 5 years ending on the date of expatriation exceeding $124,000 (adjusted for inflation after 2004),
• (2) has net worth of $2 million or more on date of expatriation, or
• (3) fails to certify under penalties of perjury that he/she has complied with all U.S. Federal tax obligations for preceding 5 years.
Exceptions: (1) certain individuals born with dual U.S. and foreign citizenship and (2) certain U.S. citizens who relinquish citizenship before reaching age 18 ½.
Covered Expatriates
Under I.R.C. § 877A, a covered expatriate is
subject to U.S. income tax on the net unrealized gain in his/her assets as if they had been sold for fair market value on the day before the
expatriation (the “mark-to-market tax”).
Applies to worldwide assets, including deferred compensation and interests in grantor trusts.
Applies to individuals whose expatriation date is on or after June 17, 2008 (a different regime
Covered Expatriates
Net gain on deemed sale is recognized to the extent it exceeds $600,000 (indexed for cost of living after 2008; $651,000 in 2012).
Subsequently-realized gains/losses adjusted for gains/losses taken into account under
mark-to-market tax, without regard to $600,000 exemption.
Covered expatriate may elect to defer payment of mark-to-market tax until due date of return for
taxable year of his/her death (subject to posting of bond and payment of interest on tax).
Election is irrevocable and made on property-by-property basis.
Covered Expatriates
Additional tax imposed on U.S. recipients of
“covered gifts or bequests”, i.e., property
acquired by gift from covered expatriate or by
reason of death of covered expatriate.
Tax is product of (i) highest marginal estate
tax rate then in effect (or, if greater, the
highest marginal gift tax rate) and (ii) value of
covered gift or bequest.
Deferral available for gifts/bequests to U.S.
citizen spouses.
POTENTIAL OPPORTUNITIES
Section IV
Gifts/Bequests by Non-Resident Aliens
Only gifts by non-resident aliens of real or tangible personal property located in the U.S. are subject to gift tax.
Gifts by non-resident aliens of intangible personal property are not subject to gift tax (but transfers of such property at death are subject to estate tax).
Planning technique: NRAs who have valuable intangible personal property located in the U.S.,
such as stocks in a U.S. corporation, might consider giving such property away during their lifetime.
Be careful with gifts of cash held in U.S. bank account
Dynasty Trusts
When giving valuable intangible personal property away during life, because of favorable GST tax
treatment, NRAs might consider transferring such property to a dynasty trust.
Since gift of intangibles is not subject to gift tax, it is not subject to GST tax and, therefore, these
assets (together with appreciation thereon) can be sheltered from gift, estate and GST tax in a
dynasty trust.
If desired, dynasty trust can still be a foreign trust even if governed by law of U.S. state.
Reporting Issues for U.S. Recipients of
Gifts/Bequests
A U.S. person must report gifts or bequests of over (a) $10,000 received in any year from a non-U.S. corporation or partnership, adjusted for inflation, and (b) $100,000 received in any year from a non-U.S. individual.
•
This requirement applies only if the recipient intends to treat the amounts received as gifts or bequests for federal tax purposes. A reportable gift does not include any payment to an educational institution or to any person who provides medical care that would be exempt from gift tax under Code section 2503(e).
Penalties for Failure to Comply with
Reporting Requirements
If any required report is not timely filed, does not include all required information, or includes incorrect information, the person required to file the report must pay a penalty equal to 35% of the gross
reportable amount.
If failure to report continues for more than 90 days after IRS mails notice of failure to report, penalty is increased by $10,000 for each additional 30-day period during which the failure continues, up to a limit equal to the gross reportable amount.
If the person required to report a gift or bequest fails to report, that person is subject to a penalty equal to 5% of the amount of the gift for each month of failure to report, up to a maximum of 25% of the aggregate amount of gifts from foreign trusts.
Penalties for Failure to Comply with
Reporting Requirements
A taxpayer is not subject to penalties if the failure to report is due to reasonable cause and not to willful neglect.
A taxpayer does not have reasonable cause
merely because a foreign country would impose a civil or criminal penalty on the trustee (or other
person) for disclosing the required information or because a foreign trustee refuses to provide
information for any other reason, including
difficulty in producing the required information or provisions in the trust instrument that prevent the disclosure of required information.
