The world today is increasingly interconnected. Global travel is commonplace these days, as is moving to another country for work or other opportunities. International marriages are also more commonplace.
So, what do these facts have to do with estate planning?
All of those factors can vastly complicate the estate planning process, as there are significantly different rules regarding income and gift and estate taxes, depending on your situation. The primary factors to consider are: Whether you are a U.S. citizen or not, and whether you are considered a U.S. resident or not (meaning where you live or are primarily based).
Tax rules also vary depending on where your assets are located (the “situs” of the assets) and the type of asset you own (e.g., real property vs. tangible personal property vs. intangible personal property). To further complicate matters, the tax law and rules can be applied very differently for the same person and the same assets, depending on whether you are discussing income tax, gift tax or estate tax. Finally, you need to be aware that anything published in this column can be overruled by a tax treaty between the United States and the country in which you are a citizen or a resident, or where the assets are located, as that can affect your tax outcomes.
International income and gift and estate tax planning are very complex and require knowledge of specialized areas of the law. Obviously, the results can vary significantly depending on the country, or countries, with which we are dealing. This column is not intended to be a full explanation of these subjects — it is merely an introduction to give you an idea of the potential problems that may be lurking out there which you may not have considered, but should look into further with professional help.
Tax Classifications and Definitions
U.S. Citizen: An individual possessing U.S. citizenship residing anywhere in the world.
• Resident Alien (for income tax purposes only): This individual either: 1) Has permanent resident status in the United States (Green Card holder); or 2) meets the substantial presence test (as defined in the following).
• Substantial Presence Test: Someone in the U.S. at least 31 days in the current year; and has a total of at least 183 days in the U.S., including: all the days in the current year; plus 1/3 of the days in the U.S. in the year immediately prior to current year; plus 1/6 of the days in the U.S. in the second year prior to the current year.
• Resident Alien (for gift and estate tax purposes): Depends on “Domicile” (i.e., how long the individual has been in the U.S., how frequently the individual travels abroad, and the individual’s intent to remain in the U.S., etc.). * Note that whether or not you are a resident for gift and estate tax purposes is different from the “Green Card” and “Substantial Presence” tests used for income tax purposes.
Non-resident Alien: Someone who is neither a U.S. citizen nor a resident alien.
U.S. citizens are taxed on all of their income earned worldwide. In other words, as a U.S. citizen, you must declare and pay income taxes on all income earned anywhere, even if you made money by working or investing outside of the United States. U.S. resident aliens are generally treated in the same manner as U.S. citizens for income tax purposes, meaning they are taxed on all worldwide income.
However, non-resident aliens are generally taxed only by the U.S. Internal Revenue Service on income generated from their trade or business in the U.S. or on other income from U.S. sources that was not adequately withheld at the source of the income (U.S. real property, U.S. stocks, etc.)
Estate and Gift Tax
U.S. citizens and resident aliens are subject to U.S. gift and estate taxes on their entire estate, regardless of where the assets are located. So, for example, if you were to inherit foreign real property from a family member in a foreign country and you decide that you don’t want it and pass it on to another person who lives in that country . . . you could be subject to a gift tax for doing so.
Although resident aliens are treated like U.S. citizens in determining their estate and gift tax liabilities, there are some important differences: One of the biggest differences is that you cannot give away unlimited amounts of assets to your spouse, tax-free, if he or she is not a U.S. citizen.
You can give unlimited amounts to your spouse if he or she is a U.S. citizen, tax-free, during your lifetime or at your death. However, even if your spouse has a Green Card and is a permanent resident, you can only give $154,000 a year to an alien spouse. The gift tax will apply to any amount over the $154,000.
U.S. citizens and resident aliens have a total lifetime exemption amount of $11.4 million that can be applied against gifts made during their lifetime or through their estates at death (taxable gifts during life reduce the total exemption amount available at death). However, non-resident aliens only have $60,000 of exemption and are taxed on “U.S. situs” assets above that amount in their estate at death, or when gifting during their lifetime.
I’ll explain each of these points in detail in future columns. For now, however, if you need help with planning how best to hold, gift or leave your assets at death — especially if you or your intended beneficiary is not a U.S. citizen — please see a qualified attorney for a personal assessment and recommendations specific to your situation.
© OKURA & ASSOCIATES, 2019