International clients living in the United States face a number of Estate Planning difficulties. For the unwary, a lack of planning can cause disaster. In this article, attorney John C. Martin goes over 4 traps for the unwary migrant who travels through, lives, or operates in the United Sates.
Estate Planning for International Customers: 3 Traps for the Unwary
International clients residing in the United States deal with a number of Estate Planning challenges. For the negligent, a lack of planning can result in disaster. In this post, the author talks about 3 traps for the unwary expatriate who travels through, lives, or operates in the United States.
First Trap: It’s Not What you Know, it’s What you Don’t Know
Often times, non-US residents doubt whether they will undergo different kinds of tax, and at what quantity. Possibly a nonresident working on a service visa pays income tax on their around the world profits, and reckons that they therefore are dealt with the like a United States citizen for all other kinds of tax. Wrong. The rules subjecting one to earnings tax differ from those for transfer tax. A person has to pay income tax if they fulfill among the following tests:
( 1 )He or she has a green card (is a lawful long-term citizen);
On the other hand, an individual is subject transfer tax based upon a much various test. What is transfer tax? Transfer tax includes the lots of kinds of taxes that Estate Planning lawyers are hired to lower or get rid of. They consist of present tax, estate tax, and generation avoiding transfer tax (GSTT). Capital gains tax is not a “transfer tax,” but it sometimes enters play when a transfer of properties is made. Who will go through transfer tax? The internal revenue code, section 2001(a), supplies that a “tax is thus enforced on the transfer of the taxable estate of every decedent who is a person or resident of the United States.” But a “resident” for earnings tax purposes, discussed above, is different from a “resident” for transfer tax purposes. The more important question for transfer tax purposes is whether one is domiciled in the country. To be domiciled in the United States:
( 1 )The person must plan to permanently reside in the United States;
Does this mean that a person who maintains a residence in the United States might not be domiciled there for transfer tax functions? Yes. If the specific meant to move back to their native land, which reality could be plainly demonstrated by the facts and situations, then the IRS might think about the person to be domiciled in their country of origin. As we will see below, this determination is essential for the types of tax that can be troubled transfers and at what quantity.
Second Trap: The $60,000 Estate Tax Exemption for non-Residents
For United States irreversible locals and residents, the 2009 estate tax exemption is equivalent to $3,500,000. That suggests that estates valued at less than $3,500,000 will not go through estate tax for decedents dying in 2009. Non-residents, however, can only move up to $60,000 without paying an estate tax. Hence, numerous non-residents living in the United States, some just with modest assets, will leave their heirs with a 45% costs on substantial taxable estates!
If a non-resident has a United States Person spouse, they can take benefit of the IRC 2523 limitless marital deduction, which postpones all estate tax until the death of the 2nd partner. Yet, numerous non-residents do not have an US resident partner. For those with non-citizen partners, a Qualified Domestic Trust (“QDOT”) can be established to make certified transfers to one’s spouse to lower or remove the estate tax costs. Together with a Credit Shelter Trust that sets aside the $60,000 exemption amount, the QDOT can be a powerful planning method. Upon his or her death, the non-Citizen partner will still leave their beneficiaries with a big taxable estate.
Third Trap: Present Tax on taxable transfers
Non homeowners can not make any “taxable transfers” for gift-tax functions without incurring a gift tax. IRC 2102, 2106(a)( 3 ), 2505. Nevertheless, they ought to bear in mind that they can make the most of gift-tax exemptions, such as the IRC 2503(b) yearly exclusion, and the special IRC 2523(i) for non citizen partners.
Also, the type of property will make a difference on whether a taxable transfer is subject to present tax. For non-resident non-domicilaries, only those possessions concerned to be positioned within the United States go through gift tax. Presents of intangible possessions, on the other hand, will not go through present tax. Why is that important? Because shares of stock are considered intangible properties, they may be moved in certain scenarios without activating any present tax. Non-residents ought to review which assets will go through gift tax in order to plan accordingly.
Conclusion: Be Prepared
Non-residents ought 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 works with worldwide clients can help reduce these and other concerns.
This post is intended to supply general details about estate planning methods and should not be relied upon as a replacement for legal recommendations from a qualified attorney. Treasury regulations require a disclaimer that to the degree this short article issues tax matters, it is not intended to be used and can not be used by a taxpayer for the function of avoiding penalties that may be imposed by law.