(I) U.S. Estate and Gift Tax Rates
U.S. citizens and U.S. domiciles are subject to U.S. Estate and Gift tax on their world-wide assets. Non-U.S. domiciles are subject to U.S. Estate and Gift Tax on U.S. assets.
In 2012, U.S. Estate & Gift Tax Rates are as follows:
1) Estate Tax Exemption is $5,120,000 ($10,240,000 husband and wife) excess assets taxed at 35%;
2) Lifetime Gift Tax Exemption is $5,120,000 ($10,240,000 husband and wife) excess assets taxed at 35%;
3) Generation Skipping Tax (“GST”) exemption taxed at 35%;
4) Up to $139,000 in gifts to an alien spouse (non-citizen) are exempt from tax;
5) Gifts received from foreign persons are reportable if they exceed $14,723 for the year;
6) Annual Gift Tax Exclusion is $13,000 ($26,000 husband and wife). Gifts in excess of the annual exclusion amount must be reported on Form 709. Taxpayers who fail to attach Form 709, past gift tax returns, to Form 706: Estate Tax Return, may trigger an audit. The IRS is aggressively pursuing this tax issue.
(II) For International investors the critical estate and gift tax planning issue is Domicile:
1) Non-Domicile international investors may gift unlimited non-U.S. situs assets with no U.S. Gift Tax.
2) U.S. Domicile international investors are subject to estate and gift tax on transfers of world-wide assets that in 2012 exceed the following exemptions:
a) $5,120,000 Estate Tax and Lifetime Gift Tax exception ($10,240,000 husband and wife)
b) $13,000 annual gift tax exemption ($26,000 husband and wife)
Domicile is determined by the facts (there is no bright line test). A foreigner living in the U.S. will be treated as domiciled in the U.S. if:
1) They reside in the U.S. (the “Presence Test”) and
2) They intent to reside in the U.S. indefinitely (The “Intent Test”)
The Intent Test
Under the intent test, a foreigner briefly living in the U.S., with no intention of later leaving the U.S., can lead to a determination of U.S. domicile.
If the foreigner has no intention to reside in the U.S. indefinitely, the foreigner can never become domiciled in the U.S. even if they lived in the U.S. for many years.
The Presence Test
Under the presence test, the IRS examines facts and circumstances to determine whether foreigners plan to stay in the U.S.
The Presence Test (facts and circumstances) includes:
1) Residences location, value and size and the amount of time spent on each residence
2) Location of Family and friends
3) Location of personal possessions
4) Location of their businesses
5) Where they are licensed to drive
6) Where they are registered to vote
7) Location of their religious organization
8) Location of their social organization
9) Location of any burial plots
10) Terms of immigration status
11) Whether they have a green card or visa
12) Whether they have a U.S. Social Security number
13) Where they declared their residence to be in a will or trust
14) Where they declare their residence in an application for a visa or “green card”.
(III) Non-Domicile Status
A foreigner who wants to establish non-domicile status should do the following in their home country:
1) Purchase a principal residence and spend as much time there as possible
2) Purchase Burial plots
3) Join clubs and religious organizations
4) Engage in business activities
5) Register to vote
6) Obtain a driver’s license
For U.S. gift tax purposes a foreigner who lives in the U.S. and intends to leave is better advised to seek a visa instead of a “green card” (since the green card is an indicia of domicile). If the IRS accepts a foreigner as a non-domicile, they may gift (U.S. gift tax-free) unlimited non-U.S. situs assets (including including stock in U.S. Corporations).
If the foreigner is treated as a U.S. domicile, they will be subject to gift tax on transfer of world-wide assets that exceed applicable exceptions (eg. $13,000 annually, $5,120,000 life-time gift tax exemption).
(IV) U.S Estate Tax Planning (Non-Domicile)
Non-domicile should reduce possible U.S. estate tax exposure:
1) Make unlimited gifts of non-U.S. situs tangible personal property (eg. shares of stock in non-U.S. corporations, tangible property located outside of the U.S. at the time of the gift (i.e. art, jewelry, cash);
2) Make unlimited gifts of shares of stock in U.S. corporations (not subject to U.S. gift tax, would be subject to U.S. estate tax);
3) Make unlimited gifts of real property located outside the U.S.;
If the transfers are within the $5,120,000 gift/estate tax exemption they will remain tax-free in the event of an adverse domicile determination under an IRS Tax Audit.
(V) U.S. Gift Tax: U.S. Situs Property
U.S. gift tax is imposed on;
1) U.S. Real Property;
2) U.S. tangible property (eg. Cash, art, jewelry) physically located in the U.S.;
3) Stock in U.S. corporations is not U.S. situs property for gift tax purposes (but is U.S. situs property for U.S. estate tax purposes.)
U.S Gift Tax: Non-U.S. Situs Property
For U.S. Gift Tax purposes, assets that are deemed outside of the U.S. (non-U.S. situs include:
1) Real, and personal property located outside the U.S.;
2) Shares of stock issued by a foreign corporation;
3) Life insurance proceeds on a non-resident individual’s life;
4) Deposits with a foreign branch of a domestic corporation (or partnership) engaged in the commercial banking business;
5) Deposits with U.S. commercial or foreign commercial banks;
6) Many types of Bonds or notes.
Tax treaties between the U.S. and a foreigner’s home country may provide further exceptions which qualify assets as non-U.S. situs for U.S. estate and gift tax purposes.
(VI) U.S. Gift Tax Planning (Non-Domiciles)
Spouses, who are non-domiciles, can make unlimited gifts to each other, outside the U.S., gift-tax free.
Non-U.S. citizen foreigner spouses, who are considered to have a U.S. domicile may each only gift the other $139,000 (2012), without using up the $5,120,000 exemption to which they will be subject.
If domicile status is unclear, in order to avoid U.S. gift tax exposure the foreigner spouse should:
1) Establish an off-shore trust (irrevocable trust);
2) Establish an off-shore account in their name;
3) Transfer $5,120,000 to the off-shore account in their name;
4) Gift $5,120,000 from the off-shore account in their name, to the off-shore trust account.
In the event of an IRS Gift Tax Audit using the gift tax exemption, there would be no U.S. gift tax exposure on the $5,120,000 gift. For the non-domicile, there would be no U.S. gift tax. For the domicile, the $5,120,000 gift would be U.S. gift-tax free, using the $5,120,000 life-time gift tax exemption.
Wealthy non-domicile may gift non-U.S. property, beyond the $5,120,000 exemption which will be U.S. gift tax-free. This gift would be subject to classification as a non-domicile, since if the IRS determines domicile the foreigner will owe gift tax, interest and penalty on the transferred amount that exceeds the $5,120,000 exemption.
Cash Gifts (Non-Domicile)
In order to avoid U.S. gift tax, non-domiciles should make cash gifts outside of the U.S. as follows:
1) Establish a non-U.S. account in the non-domicile’s name and transfer funds to it;
2) Have the U.S. donee (whether an individual or trust) set up a non-U.S. account in donee’s name;
3) Gift from the non-domicile non-U.S. account to the U.S donee’s non-U.S. account;
4) The U.S. donee may then wire transfer funds from the non-U.S. account to the U.S. donee’s account.
Stock: U.S. Corporations
1) A non-domicile, who owns stock in a U.S. corporation, should gift the stock while alive (so no U.S. estate tax on death). The non-domicile gift of U.S. stock is U.S. gift-tax-free.
2) A non-domicile, who is concerned that they may be deemed domiciled in the U.S., under an IRS gift tax audit, should gift the stock (under the gift tax exemption i.e. $5,120,000). If the gift is made while alive, it will either be not subject to IRS gift tax audit (with no tax imposed) or if subject to IRS gift tax audit, exempt from U.S. gift tax, up to $5,120,000 in value (if U.S. domicile is deemed established by the IRS, under the audit).