Please remember that each state has own transfer tax policy. California state is one of the states that do not have a transfer (estate, gift, generation skipping) tax. You, though, may still have to consider the federal transfer tax. When you deal with the international transfer of wealth, you always have to check the laws of state, each country, and treaty, if available, between the countries.
General Rules in 2018
Here are the general rules regarding US federal transfer tax related to US person (US citizen or US resident) & Non-US Person (Non-Resident Alien (NRA)):
US Persons are subject to transfer tax on worldwide assets.
Non-US Persons are subject to Transfer Tax just on US situs assets. US assets (US situs assets) are not just assets physically located in the US, but can also be bank accounts.
Non-US Persons do not get the benefit of full unified credit. $60,000 exemption amount.
Annual gift exclusion of $15,000 per one donee is available for all (US person & NRA) donors.
Non-US persons generally do not qualify for the marital deduction.
If the surviving spouse for estate tax purpose or the donee for gift tax purpose is US citizen, the unlimited marital deduction will be available.
Inter-spousal gift to a non-citizen spouse will qualify for the special annual gift exclusion amount of $152,000 (instead of marital deduction).
Otherwise, the marital deduction will not be available unless QDOT (explained later) is set up.
US Person – Estate Tax on Worldwide Assets
US Persons are subject to transfer tax on worldwide assets.
Estate tax will be imposed on estates of citizens or residents. 26U.S.C.§2001. Determination of whether someone is the resident is not based on the strict physical present test like that of income tax. For estate tax purpose, the residency is decided by the “domicile test”.
The domicile test is a subjective test, meaning a state of mind. According to the regulation, a person acquires domicile in a place by living there, for even a brief period of time, with no definite present intention of later removing therefrom. 26 CFR§20.0-1(b)(1). The fact that the person has a green card would likely demonstrates an intent to remain the U.S. indefinitely. Driver’s license, voter registration, income tax return, mortgage applications, wills, real estate taxes, bank accounts, etc also would weigh in.
Gift tax will be imposed on the transfer of property by any individuals (26U.S.C.§2501(a)(1)), but as described below in the case of Non-Resident Alien, the gift tax will be imposed only if the property is situated within the U.S. General Skipping Tax will also be applied to the transfer that would be subject to the US estate tax or US gift tax. 26 CFR§26.2611-1.
NRA – Transfer Tax only on US Situs Assets
Non-Resident Alien is subject to transfer tax only on US situs property.
Estate tax will be imposed only on the property which at the time of death is situated within the U.S. 26U.S.C.§2103, Id.§2101(a).
Estate tax code provides a unified credit against the Estate tax only by $13,000 (meaning $60,000 of exemption amount). Id.§2102(b)(1). This credit amount can be expanded by making an election of the treaty (Id.§2102(b)(3)). Please keep in mind that the credit permitted under the treaty must be equal to the amount which bear the same ratio of the decedent’s property that is in the U.S. If the decedent had 20 million worth of worldwide assets but only 10 million was situated in the U.S., the credit permitted in the treaty should be adjusted to 50% of the amount. This means that you have to disclose the worldwide assets to the U.S. to make the election.
Gift tax will be imposed on the NRA donor only if the property is situated within the U.S. Id.§2511(a). The transfer of intangible property will be excluded for gift tax purpose. Id.§2501(a)(2).
Please note that the exemption is not available for the NRA donor. There is also a special tax credit on foreign gift tax paid under §2501(a)(3).
There is a significant planning opportunity for avoiding taxes by gifting intangibles and non US-situs property.
Continue to Part 2…
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