US Estate Tax Implications for Non-US Citizens

Residing in the United States offers varying degrees of flexibility for both resident and nonresident aliens. However, regardless of their duration of stay, non-US citizens may face significant US estate tax consequences if they do not engage in careful planning prior to their demise.

In the United States, estate and gift taxation apply to US citizens and US domiciliaries, subjecting them to a maximum tax rate of 40%. They are granted an exemption amount of $10 million, adjusted for inflation. On the other hand, non-US domiciliaries are also subject to US estate and gift taxation on certain types of US assets, with the same maximum tax rate of 40%. However, they are eligible for a significantly lower exemption of only $60,000, which solely applies to transfers upon death.

Determining domicile for estate and gift tax purposes is a distinct process from determining US income tax residence. Various factors are considered to ascertain US domicile, including statements of intent found in visa applications, tax returns, wills, and other relevant documents. Additional factors include the length of US residence, possession of a green card, lifestyle both in the US and abroad, ties to the individual's former country, country of citizenship, location of business interests, and affiliations with clubs, churches, voting registration, and driver licenses. Failure to meet the established criteria through a facts and circumstances test results in the individual being considered a non-US domiciliary for estate and gift tax purposes. It's important to note that an individual can be considered a domiciliary by multiple countries, and certain assets may be subject to estate or gift tax in more than one jurisdiction.

Tax treaties play a crucial role in defining domicile, resolving dual-domicile issues, mitigating or eliminating double taxation, and providing additional deductions and tax relief. As of January 2022, the US has estate and/or gift tax treaties in place with 16 jurisdictions, including Japan, Canada, the United Kingdom, and Austria. These treaties establish rules and guidelines to ensure fair and equitable treatment of taxpayers. However, it's important to be aware that not all countries have such tax treaties in effect with the United States. For instance, there is currently no estate and gift tax treaty between the US and Korea.

Similar to US citizens, US domiciliaries are liable to be taxed on the value of their worldwide assets upon death, meaning that their estate, regardless of its location, is subject to US estate tax. Conversely, non-US domiciliaries are solely taxed on the value of their US "situs" assets. US situs assets generally include real estate, tangible personal property situated in the US, business assets located within the US, and stocks of US corporations. The definition of US situs assets may be influenced by applicable estate and gift tax treaties.

Regarding gift tax, US citizens and domiciliaries are subject to tax on all lifetime gifts, regardless of the location of the property. In contrast, non-US domiciliaries are only subject to US gift tax on transfers of tangible personal property and real property located in the US.

To minimize the impact of estate and gift taxes, individuals can take advantage of available annual exclusions or deductions, including marital or other deductions. The remaining exemption amount can then be used to offset taxable gifts or bequests. It's important to note that any portion of the exemption used during an individual's lifetime will not be available as an exemption upon their death. Non-US domiciliaries have no exemption amount available for lifetime transfers, and the exemption amount for transfers upon death by non-US domiciliaries is only $60,000.

Additionally, individuals should consider the generation-skipping transfer tax (GST tax) alongside estate and gift taxes. The GST tax is imposed in addition to estate or gift taxes and applies to certain transfers made to beneficiaries who are two or more generations below the donor, such as grandchildren. The GST tax also applies to gifts made to unrelated individuals who are more than 37.5 years younger than the donor. However, certain circumstances may allow for a GST annual exclusion, and there exists a GST exemption that exempts $12,060,000 (the same as the estate and gift tax exemption, adjusted for inflation) of assets from the GST tax.

Non-US citizens who reside, work, or own property in the US must have a comprehensive understanding of the potential implications arising from US estate and gift tax rules. Residency and domicile choices carry significant tax implications that can impact an individual's financial planning and wealth preservation strategies. It is highly advisable for individuals in such situations to seek the guidance of an international estate planning professional to assess the impact and develop an appropriate approach based on their individual circumstances.

A crucial caveat to consider is that the current exemption amount of $12,060,000 is temporary and applicable only until 2025. Unless Congress enacts permanent changes, the exemption will revert to $5.49 million (adjusted for inflation) after 2025. Therefore, it is essential for individuals to explore how to make the most of this increased exemption before it expires.

Additionally, US citizens who renounce their citizenship and long-term residents (as defined in IRC section 877(e)) who end their US resident status may be subject to expatriation tax under IRC section 877A. Covered individuals are subject to income tax on the net unrealized gain in the year of expatriation as if the property had been sold for its fair market value ("mark-to-market tax"). Additional information will be furnished on our next newsletter.

As global mobility becomes increasingly prevalent among individuals and companies, more people will be affected by multinational tax rules. It is crucial for individuals acquiring US property or planning to move to the US to carefully consider the necessary steps to ensure they are adequately prepared for potential US estate and gift tax implications.

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