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BY JIE ZHU, CPA
Estate & Gift Tax Planning
Being a tax resident for estate and gift tax purposes can have significant impact on how estates and gifts are taxed.
"I’m retiring and moving to Italy.
“We’re applying for green cards and moving to America.” “I was assigned to work in China, but my family will remain in the U.S.” “I’d like to give up my citizenship.”
These are the kinds of statements I hear when talking with clients. Often, these statements precede, or trigger, questions related to moving around the world or status changes. Considering the global nature of society today, it’s exceedingly common that someone live and work in multiple countries throughout their career, or that members of a nuclear family could live and work in different countries. How to juggle and coordinate tax rules in multiple countries can be challenging at best and often confusing. Clients almost never fail to ask questions about what international moves mean for their specific tax situation. What’s often being overlooked, however, is the question of estate and gift tax impact for cross-border families.
To Each Their Own
Each country has its own rules and requirements when it comes to taxes. Understanding the rules in each jurisdiction involved, and planning in advance, can help avoid uncertainties and unnecessary legal proceedings and reduce tax burdens.
Nationality (citizenship), residency and domicile are important factors many countries consider when determining tax residency for estate and gift tax purposes. For example, in the United States, when it comes to estate and gift tax residency, the determination focuses on intention on “domicile.” What’s domicile? It’s the country that a person treats as his or her permanent home. In other words, where the taxpayer is planning to live for the rest of his or her life.
Being a tax resident for estate and gift tax purposes can have significant impact on how estates and gifts are taxed. It also may impact how the estate is allocated, since many countries have rules regarding forced heirship where the laws require that assets be passed to certain heirs—which could be dramatically different from what the decedent might wish to do. Some countries may require that estate taxes or gift taxes be borne by the decedent or donor, while other countries may require that the taxes be paid by the recipient.
Domicile & Situs
If a taxpayer is domiciled in the U.S., the person is subject to U.S. estate and gift taxes for their worldwide assets; meanwhile, the taxpayer will have the benefit of a lifetime exemption available (currently $12.06 million). If a taxpayer is domiciled in a foreign country, they will be considered a nonresident for U.S. estate and gift tax purposes and the person will be subject to U.S. estate and gift taxes on U.S. situs (the place to which, for purposes of legal jurisdiction or taxation, a property belongs) assets only, but the $12.06 million lifetime exemption is not available in this case.
Situs of assets plays an important role in estate and gift tax planning. Using the U.S. as an example, real estate properties located in the U.S. are always considered U.S. situs property for estate and gift tax purposes. It’s irrelevant whether the taxpayer is a U.S. tax resident. U.S. corporation stocks are treated in the same way as real estate for U.S. tax residents, but differently for non-residents. U.S. corporation stocks are not U.S. situs property when a non-resident gifts the shares. However, the stocks would be considered U.S. situs property for estate tax purposes when the nonresident holds the shares upon death.
The U.S. has estate and gift tax treaties with various countries. The treaties provide a certain level of protection for specific taxpayers with assets in multiple countries and should be considered in planning.
Considerations for Nonresidents
As for estate and gift planning for nonresidents, several factors should be considered. Some are the same as would be considered by residents formulating their estate plans, such as family dynamic, type of assets and income that would be generated by certain assets.
Conversely, some factors are unique to nonresidents. Under U.S. tax laws, for U.S. gift tax purposes nonresidents can gift foreign assets to U.S. residents without being subject to U.S. gift tax. This provides opportunities for nonresidents to gift before becoming U.S. tax residents for estate and gift tax purposes.
Trusts are commonly used in domestic estate and gift planning. Similarly, trusts can be used for international estate and gift planning as well. What type of trust is used depends upon the specific situation. Both foreign and U.S. trusts could be considered.
A U.S. domestic trust may be created and funded by a foreign person for benefit of U.S. beneficiaries, while a U.S. resident may create a foreign trust for benefit of U.S. or foreign beneficiaries. The gifts mentioned above can be made through trusts when appropriate. However, one should pay close attention to U.S. trust tax reporting if one holds foreign assets. As mentioned, U.S. tax laws—such as rules related to controlled foreign corporations, passive foreign investment companies and foreign bank accounts—are quite complex with respect to foreign asset reporting, and the penalties for misreporting could be significant.
Life Insurance No Longer Discussing ‘Trusts’
Including life insurance in your planning strategy, such as leveraging a Private Placement Life Insurance Trust (PPLI), also can be effective. PPLIs provide flexibility as to the types of assets you can contribute into the trust, particularly if the trust is set up in certain foreign jurisdictions. However, there are questions to consider when determining whether setting up a PPLI in a foreign jurisdiction actually makes sense.
• Can the taxpayer easily deal with dispute(s) in the foreign jurisdiction?
• What is the tax impact on the taxpayer in the country in which they are considered a resident?
Because navigating laws and regulations in different jurisdictions can be so convoluted, engaging and coordinating with advisors who are well-versed in local rules is crucial to effective planning involving cross-border issues. To be clear, there is no “one size fits all” plan or solution. Taxpayers should be aware of all the factors and consider the tradeoffs that may be necessary during the planning process. Through review and planning, they may just find a balancing point.
This material is provided for informational purposes only and is not intended to provide, nor should be relied upon for, tax, legal or accounting advice. You should consult certified tax, legal, and/or accounting professionals prior to engaging in any transactions.
Jie Zhu, CPA is a partner with Petrinovich Pugh & Company, LLP. You can reach her at