International customers residing in the United States face a variety of Estate Planning obstacles. For the negligent, an absence of planning can result in catastrophe. In this post, lawyer John C. Martin goes over four traps for the unwary migrant who goes through, lives, or operates in the United Sates.
Estate Planning for International Clients: Three Traps for the Unwary
International clients residing in the United States face a number of Estate Planning difficulties. For the unwary, an absence of planning can lead to disaster. In this short article, the author discusses three traps for the negligent expatriate who passes through, lives, or works in the United States.
First Trap: It’s Not What you Know, it’s What you Don’t Know
Often times, non-US citizens are unsure whether they will go through various sort of tax, and at what quantity. Maybe a nonresident working on an organisation visa pays income tax on their around the world revenues, and reckons that they for that reason are dealt with the like a United States resident for all other kinds of tax. Incorrect. The guidelines subjecting one to earnings tax vary from those for transfer tax. An individual needs to pay income tax if they meet one of the following tests:
( 1 )He or she has a green card (is a lawful permanent resident);
On the other hand, a person is subject transfer tax based on a much different test. What is transfer tax? Transfer tax includes the lots of types of taxes that Estate Planning lawyers are employed to reduce or get rid of. They include present tax, estate tax, and generation skipping transfer tax (GSTT). Capital gains tax is not a “transfer tax,” but it in some cases enters play when a transfer of possessions is made. Who will be subject to move tax? The internal profits code, area 2001(a), offers that a “tax is hereby troubled the transfer of the taxable estate of every decedent who is a citizen or local of the United States.” A “resident” for earnings tax purposes, talked about above, is various from a “resident” for transfer tax functions. The more vital concern for transfer tax functions is whether one is domiciled in the country. To be domiciled in the United States:
( 1 )The individual must mean to permanently live in the United States;
Does this mean that an individual who keeps a house in the United States might not be domiciled there for transfer tax purposes? Yes. If the private meant to move back to their native land, and that fact might be clearly demonstrated by the facts and situations, then the IRS might consider the person to be domiciled in their native land. As we will see below, this determination is essential for the kinds of tax that can be troubled transfers and at what quantity.
Second Trap: The $60,000 Estate Tax Exemption for non-Residents
For United States permanent locals and citizens, the 2009 estate tax exemption is equivalent to $3,500,000. That means that estates valued at less than $3,500,000 will not go through estate tax for decedents passing away in 2009. Non-residents, however, can only transfer as much as $60,000 without paying an estate tax. Hence, numerous non-residents living in the United States, some just with modest assets, will leave their successors with a 45% expense on substantial taxable estates!
If a non-resident has an US Citizen spouse, they can take benefit of the IRC 2523 unlimited marital reduction, which delays all estate tax until the death of the 2nd spouse. Lots of non-residents do not have a United States citizen partner. For those with non-citizen partners, a Certified Domestic Trust (“QDOT”) can be developed to make qualified transfers to one’s partner to minimize or eliminate the estate tax bill. Together with a Credit Shelter Trust that reserves the $60,000 exemption quantity, the QDOT can be a powerful planning method. Upon his or her death, the non-Citizen partner will still leave their beneficiaries with a large taxable estate.
Third Trap: Present Tax on taxable transfers
Non citizens can not make any “taxable transfers” for gift-tax functions without sustaining a present tax. IRC 2102, 2106(a)( 3 ), 2505. However, they ought to remember that they can benefit from gift-tax exemptions, such as the IRC 2503(b) annual exemption, and the unique IRC 2523(i) for non resident partners.
Also, the type of property will make a difference on whether a taxable transfer undergoes present tax. For non-resident non-domicilaries, just those assets concerned to be positioned within the United States are subject to present tax. Gifts of intangible properties, on the other hand, will not be subject to gift tax. Why is that essential? Considering that shares of stock are considered intangible properties, they may be transferred in particular situations without triggering any gift tax. Non-residents ought to examine which assets will be subject to gift tax in order to plan accordingly.
Conclusion: Be Prepared
Non-residents should look for education in order to reduce an undesirable level of exposure to transfer tax both now and upon their death. Consulting with an estate planning lawyer who deals with international customers can help mitigate these and other problems.
This short article is intended to offer basic information about estate planning strategies and need to not be relied upon as a substitute for legal advice from a certified lawyer. Treasury policies need a disclaimer that to the extent this post concerns tax matters, it is not intended to be used and can not be utilized by a taxpayer for the function of avoiding charges that might be imposed by law.