International customers living in the United States deal with a number of Estate Planning obstacles. For the negligent, an absence of planning can cause disaster. In this article, attorney John C. Martin discusses four traps for the unwary migrant who goes through, lives, or works in the United Sates.
Estate Planning for International Clients: Three Traps for the Unwary
International customers living in the United States deal with a number of Estate Planning difficulties. For the negligent, an absence of planning can cause disaster. In this post, the author talks about 3 traps for the negligent expatriate who travels 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 residents are uncertain whether they will undergo various sort of tax, and at what quantity. Maybe a nonresident working on a service visa pays earnings tax on their around the world profits, and reckons that they therefore are dealt with the very same as an US person for all other kinds of tax. Wrong. The rules subjecting one to income tax vary from those for transfer tax. An individual has to pay earnings tax if they meet among the following tests:
( 1 )He or she has a permit (is a legal irreversible citizen);
On the other hand, a person is subject transfer tax based upon a much different test. What is transfer tax? Transfer tax consists of the lots of types of taxes that Estate Planning attorneys are worked with to decrease or remove. They include present tax, estate tax, and generation skipping transfer tax (GSTT). Capital gains tax is not a “transfer tax,” however it sometimes enters into play when a transfer of assets is made. Who will go through move tax? The internal profits code, area 2001(a), provides that a “tax is hereby imposed on the transfer of the taxable estate of every decedent who is a citizen or citizen of the United States.” However a “resident” for earnings tax functions, discussed above, is different from a “resident” for transfer tax purposes. The more crucial question for transfer tax functions is whether one is domiciled in the country. To be domiciled in the United States:
( 1 )The person must intend to permanently reside in the United States;
Does this mean that a person who maintains a house in the United States might not be domiciled there for transfer tax purposes? Yes. If the specific planned to return to their nation of origin, and that truth could be clearly shown by the facts and situations, then the Internal Revenue Service might think about the person to be domiciled in their country of origin. As we will see below, this determination is crucial for the types of tax that can be imposed on transfers and at what amount.
Second Trap: The $60,000 Estate Tax Exemption for non-Residents
For United States permanent homeowners and citizens, 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, nevertheless, can only transfer up to $60,000 without paying an estate tax. Hence, lots of non-residents living in the United States, some just with modest properties, will leave their heirs with a 45% costs on sizable taxable estates!
If a non-resident has an US Person spouse, they can make the most of the IRC 2523 endless marital reduction, which delays all estate tax until the death of the second partner. Many non-residents do not have an US citizen partner. For those with non-citizen partners, a Certified Domestic Trust (“QDOT”) can be developed to make qualified transfers to one’s spouse to reduce or eliminate the estate tax bill. Together with a Credit Shelter Trust that sets aside the $60,000 exemption quantity, the QDOT can be a powerful planning strategy. Upon his or her death, the non-Citizen partner will still leave their beneficiaries with a big taxable estate.
Third Trap: Gift Tax on taxable transfers
Non citizens can not make any “taxable transfers” for gift-tax functions without incurring a present tax. IRC 2102, 2106(a)( 3 ), 2505. They should keep in mind that they can take advantage of gift-tax exclusions, such as the IRC 2503(b) yearly exemption, and the special IRC 2523(i) for non resident 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, only those properties concerned to be positioned within the United States are subject to present tax. Gifts of intangible properties, on the other hand, will not undergo present tax. Why is that essential? Given that shares of stock are thought about intangible assets, they may be transferred in particular circumstances without triggering any present tax. Non-residents should evaluate which possessions 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 direct exposure to move tax both now and upon their death. Consulting with an estate planning attorney who works with worldwide customers can assist mitigate these and other problems.
This post is intended to offer general information about estate planning techniques and need to not be trusted as a replacement for legal advice from a qualified lawyer. Treasury guidelines require a disclaimer that to the extent this short article issues tax matters, it is not planned to be used and can not be utilized by a taxpayer for the purpose of avoiding charges that might be enforced by law.