Transfer tax planning for high net worth clients can be sophisticated. When the client is a foreign national, planning becomes even more complex due to the myriad of tax rules based on residence, citizenship, type and situs of property, and how the property is being transferred — as a gift during lifetime, or as a bequest at death.
Below are 4 general charts that help navigate through the rules. Treaty agreements between the U.S. and the non-citizen’s home country may alter or replace the general rules discussed herein.
1. Estate and Gift Tax by Citizenship, Residence & Property Type
|GENERAL OVERVIEW OF ESTATE & GIFT SITUS RULES|
|Type of Tax||U.S. Citizen||U.S. Resident||Non-Resident Alien|
|Gift Tax||Worldwide gifts subject to U.S. gift tax||Worldwide gifts subject to U.S. gift tax||Gifts of real and tangible personal U.S. situs property subject to U.S. gift tax.
Gifts of intangible U.S. situs property (i.e. stocks, certain deposits, life insurance) and gifts of non-U.S. situs property not subject to U.S. gift tax
|Estate Tax||Worldwide property owned by decedent subject to U.S. estate tax||Worldwide property owned by decedent subject to U.S. estate tax||U.S. situs property owned by decedent subject to U.S. estate tax|
When U.S. citizens transfer property during lifetime, gift taxes may be due, net of gift tax exemptions or exclusions that may apply. When the property is transferred at death, estate taxes apply, net of any exemptions available. Married couples, who are both U.S. citizens, are also allowed to transfer assets to each other during lifetime or at death with no gift or estate tax consequences.
In contrast, if an individual is a U.S. resident but not a U.S. citizen (i.e., a non-citizen spouse of a U.S. citizen, for example), lifetime gifts and bequests at death of any property transferred, even when it is transferred to a citizen spouse– regardless of where the property is situated– are subject to gift or estate tax, depending on when it is transferred—during lifetime (gift tax), or at death (estate tax). Non-citizens who do not reside in the U.S. but who own real and/or tangible property with a U.S. situs, will be taxed accordingly on that property when it is transferred.
2. Gift Taxes on Property Transferred by Non-Resident Aliens
Generally, any property that is defined as real or tangible property with situs in U.S. at the time of transfer, is subject to gift tax when transferred during lifetime. Real property is considered to include immovable property like land and buildings, while tangible personal property is physical property like equipment that can be depreciated. For purposes of tax rules, tangibles include cash but not monetary instruments. However, it’s interesting to note that a life insurance policy owned by a non-resident alien that insures a non-resident alien or someone else can be transferred without gift tax.
|GENERAL TAX SITUS GUIDELINES FOR NON-RESIDENT ALIENS BY TYPE OF PROPERTY|
|TYPE OF PROPERTY||GIFT TAXABLE||NOT GIFT TAXABLE
(OR EXCEPTIONS TO THE RULE)
|General Rule||Real and tangible personal property with situs in U.S. at time of transfer||Property with no U.S. situs, even if the gift to a U.S. citizen or resident. All intangible personal property, regardless of situs.|
|Real Property||Real property (i.e., land, buildings, fixtures, improvements) located in U.S.||Real property outside U.S.|
|Tangible Personal Property||Property physically in U.S. (equipment) NOTE: Cash/currency, whether in U.S, dollars or foreign currency, is treated as tangible property and will be subject to gift tax when gift is made within the U.S.||Property outside the U.S.|
|Intangible Personal Property||None. NOTE: This is in contrast with estate tax rules where such property located in the U.S. is subject to estate tax.||Intangible personal property (i.e., stocks, mutual funds, bank, brokerage, fiduciary accounts), even if located in U.S.|
|Life Insurance||Gifts of cash by a non-resident alien to make premium payments are gifts of cash and subject to gift tax (unless limited to the annual gift tax exclusion for non-residents)||Policy insuring a non-resident alien or another can be transferred without gift tax|
1 Many non-resident aliens will own CDs in U.S. since they are an intangible asset and excluded from U.S. However, if CDs are purchased from a U.S. brokerage firm, they may be subject to estate tax since these are generally tradeable on an exchange, and not issued directly by a U.S. bank.
3. Estate Taxes On Property Transferred by Non-Resident Aliens
Generally, most situs property owned by a non-U.S. resident will be subject to estate tax , as indicated by the below chart. Interestingly, life insurance proceeds from a policy, owned by, and on the life of, the non-resident alien are not included in the taxable estate of the non-resident alien. This means the policy does not need to be owned by a trust for tax purposes, though a trust may be preferable for other non-tax reasons. However, the value of a life insurance policy owned by the non-resident on the life of another will be includible in the non-resident’s taxable estate at death.
|GENERAL ESTATE TAX SITUS GUIDELINES FOR NON-RESIDENT ALIENS BY TYPE OF PROPERTY|
|TYPE OF PROPERTY||INCLUDED IN TAXABLE ESTATE||NOT INCLUDED IN TAXABLE ESTATE
|General Rule||Assets residing or titled within U.S. must be fully disclosed on Form 706NA||Assets not residing within U.S. generally do not have to be disclosed|
|Real property||Real property (i.e., land, buildings, fixtures, improvements) located in U.S.)||Real property owned by foreign nationals if only temporarily visiting U.S.|
|Tangible Personal property||Property physically in the U.S. NOTE: Cash/currency is considered tangible property (although most forms of monetary instruments are not) and is taxable if in U.S.||Tangible property in the possession of foreign national if only temporarily visiting the U.S.|
|Bank, Brokerage & Fiduciary Accounts 1||Funds held by U.S. banks or other financial institutions if used in connection with a U.S. trade or business and the funds are held in a brokerage accounts. Deposits with domestic branches of foreign banks are also subject to this trade or business requirement.||Savings and checking accounts, or CDs issued by a U.S. bank if not used in connection with a U.S. trade or business; funds held in a U.S. bank custody account; funds deposited in a foreign branch of a U.S. bank|
|Qualified Retirement Accounts||Assets held by plan administrators representing work for a U.S. company||Assets not residing within U.S. generally do not have to be disclosed|
|Stocks||Shares issued by U.S. corporation, regardless of situs||Shares issued by a foreign corporation, regardless of situs|
|Life Insurance||The value of a policy on the life of another person (i.e.: ITR), issued by a U.S. licensed insurance company and owned by the decedent||The proceeds from a life insurance policy on the life of a non-resident, owned by the non-resident, regardless of the insurer’s country of origin|
|Annuities||The value of any annuity issued by a U.S. insurance company on the life of another||Annuities where issued by foreign insurers.|
1 Indexed for inflation. Per the 2017 Tax Act, inflation will be based on ‘chained inflation’ methodology moving forward
4. Gift & Estate Exclusions and Exemptions by Citizenship Status
The below chart generally summarizes the estate and gift tax exemptions, exclusions and deductions available based on citizenship status. It’s important to note that a Resident Noncitizen spouse married to a U.S. citizen spouse does not benefit from the unlimited marital deduction between spouses at the citizen spouse’s death. This means that the decedent spouse’s assets will be estate taxed at death before transferring to the surviving non-citizen spouse.
However, a QDOT, a Qualified Domestic Trust, is a specialized trust that can be established by a resident non-citizen spouse to hold assets of the deceased citizen spouse, for the surviving noncitizen spouse’s benefit. The rules for accessing income and principal are very complex and can inadvertently trigger estate tax. A more flexible option and an alternative to a QDOT is the Spousal Lifetime Access Trust (SLAT) funded with life insurance.
|Summary of Estate & Gift Tax Exemptions/Exclusions By Citizenship Status|
|Decedent/ Surviving Spouse||Decedent’s Estate Tax Applicable Exclusion Amount 1||Estate Tax Marital Deduction||Decedent’s Interest In Property Held Jointly with Spouse||Annual Marital Gift Tax Exclusion||Availability of Gift Splitting to a Third Party||Availability of Gift Tax Annual Exclusion|
|U.S. Citizen/ U.S. Citizen||$11.18M||Unlimited||50%||Unlimited||Available||Available|
|$11.18M||Only with QDOT||100%||$152,000||Available||Available|
|U.S. Citizen/ Non-Resident Alien||$11.18M||Only with QDOT||100%||$152,000||Not Available||Available|
|Resident Alien/ U.S. Citizen||$11.18M||Unlimited||50%||Unlimited||Available||Available|
|Resident Alien/ Resident Alien||$11.18M||Only with QDOT||100%||$152,000||Available||Available|
|Resident Alien/ Non-Resident Alien||$11.18M||Only with QDOT||100%||$152,000||Not Available||Available|
|Non-Resident Alien/ U.S. Citizen||$60,000||Unlimited||50%||Unlimited||Not Available||Available|
|Non-Resident Alien/ Resident Alien||$60,000||Only with QDOT||100%||$152,000||Not Available||Available|
|Non-Resident Alien/ Non-Resident Alien||$60,000||Only with QDOT||100%||$152,000||Not Available||Available|