Estate Planning for International Customers: 3 Traps for the Unwary
International customers living in the United States deal with a variety of Estate Planning challenges. For the unwary, a lack of planning can result in catastrophe. In this post, lawyer John C. Martin discusses four traps for the negligent expatriate who travels through, lives, or works in the United Sates.
Estate Planning for International Clients: 3 Traps for the Unwary
International clients living in the United States deal with a number of Estate Planning challenges. For the negligent, a lack of planning can lead to catastrophe. In this short article, the author discusses 3 traps for the unwary migrant who goes through, lives, or works in the United States.
First Trap: It’s Not What you Know, it’s What you Do not Know
Often times, non-US residents are unsure whether they will undergo different kinds of tax, and at what amount. Possibly a nonresident working on a business visa pays earnings tax on their around the world profits, and reckons that they for that reason are treated the like a United States resident for all other types of tax. Incorrect. The rules subjecting one to income tax differ from those for transfer tax. A person has to pay income tax if they meet one of the following tests:
( 1 )He or she has a green card (is a lawful irreversible citizen);
On the other hand, a person is subject transfer tax based on a much various test. What is transfer tax? Transfer tax includes the lots of types of taxes that Estate Planning attorneys are employed to minimize or eliminate. They consist of present tax, estate tax, and generation avoiding transfer tax (GSTT). Capital gains tax is not a “transfer tax,” however it in some cases enters into play when a transfer of assets is made. Who will undergo transfer tax? The internal revenue code, section 2001(a), supplies that a “tax is hereby enforced on the transfer of the taxable estate of every decedent who is a person or resident of the United States.” A “resident” for earnings tax purposes, gone over above, is various from a “resident” for transfer tax purposes. The more essential question for transfer tax purposes 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 preserves a house in the United States might not be domiciled there for transfer tax functions? Yes. If the individual planned to move back to their nation of origin, and that fact might be clearly demonstrated by the realities and circumstances, then the IRS might think about the individual to be domiciled in their native land. As we will see below, this determination is necessary for the kinds of tax that can be enforced on transfers and at what amount.
Second Trap: The $60,000 Estate Tax Exemption for non-Residents
For United States long-term residents and people, the 2009 estate tax exemption amounts to $3,500,000. That indicates 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 just move as much as $60,000 without paying an estate tax. Therefore, lots of non-residents living in the United States, some only with modest properties, will leave their beneficiaries with a 45% bill on large taxable estates!
If a non-resident has an US Citizen spouse, they can benefit from the IRC 2523 endless marital deduction, which defers all estate tax until the death of the 2nd spouse. Many non-residents do not have an US resident spouse. For those with non-citizen spouses, a Certified Domestic Trust (“QDOT”) can be developed to make competent transfers to one’s partner to decrease or remove the estate tax expense. Together with a Credit Shelter Trust that reserves the $60,000 exemption amount, the QDOT can be an effective planning strategy. Nonetheless, upon his or her death, the non-Citizen spouse will still leave their beneficiaries with a big taxable estate.
Third Trap: Present Tax on taxable transfers
Non locals can not make any “taxable transfers” for gift-tax purposes without incurring a present tax. IRC 2102, 2106(a)( 3 ), 2505. They need to keep in mind that they can take benefit of gift-tax exemptions, such as the IRC 2503(b) annual exclusion, and the special IRC 2523(i) for non person partners.
Also, the kind of property will make a distinction on whether a taxable transfer is subject to gift tax. For non-resident non-domicilaries, just those assets concerned to be located within the United States are subject to present tax. Gifts of intangible possessions, on the other hand, will not be subject to gift tax. Why is that essential? Given that shares of stock are considered intangible possessions, they might be transferred in certain scenarios without triggering any present tax. Non-residents should evaluate which possessions will undergo present tax in order to plan accordingly.
Conclusion: Be Prepared
Non-residents need to seek education in order to lessen an unfavorable level of exposure to transfer tax both now and upon their death. Consulting with an estate planning attorney who deals with worldwide customers can assist alleviate these and other problems.
This short article is planned to provide basic info about estate planning techniques and must not be relied upon as a substitute for legal guidance from a qualified attorney. Treasury guidelines need a disclaimer that to the level this short article concerns tax matters, it is not planned to be utilized and can not be utilized by a taxpayer for the function of avoiding penalties that might be imposed by law.