International customers living in the United States face a number of Estate Planning challenges. For the unwary, a lack of planning can result in disaster. In this post, attorney John C. Martin goes over four traps for the unwary expatriate who passes through, lives, or operates in the United Sates.
Estate Planning for International Customers: 3 Traps for the Unwary
International customers living in the United States deal with a variety of Estate Planning challenges. For the negligent, a lack of planning can result in catastrophe. In this post, the author talks about three traps for the unwary expatriate who goes through, lives, or works 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 various kinds of tax, and at what amount. Maybe a nonresident working on an organisation visa pays income tax on their worldwide earnings, and reckons that they for that reason are dealt with the exact same as an US resident for all other kinds of tax. Wrong. The rules subjecting one to earnings tax vary from those for transfer tax. A person needs to pay income tax if they satisfy one of the following tests:
( 1 )She Or He has a permit (is a lawful long-term homeowner);
On the other hand, a person is subject transfer tax based upon a much different test. What is transfer tax? Transfer tax consists of the many kinds of taxes that Estate Planning lawyers are hired to minimize or get rid of. They consist of gift tax, estate tax, and generation skipping transfer tax (GSTT). Capital gains tax is not a “transfer tax,” but it sometimes comes into play when a transfer of properties is made. Who will undergo move tax? The internal earnings code, section 2001(a), supplies that a “tax is thus enforced on the transfer of the taxable estate of every decedent who is a citizen or local of the United States.” However a “resident” for earnings tax purposes, gone over above, is various from a “resident” for transfer tax functions. The more vital concern for transfer tax functions is whether one is domiciled in the country. To be domiciled in the United States:
( 1 )The individual must mean to permanently live in the United States;
Does this mean that a person who maintains a house in the United States might not be domiciled there for transfer tax purposes? Yes. If the private meant to return to their country of origin, which reality might be clearly demonstrated by the facts and situations, then the Internal Revenue Service may think about the person to be domiciled in their native land. As we will see below, this determination is essential for the types of tax that can be enforced on transfers and at what quantity.
Second Trap: The $60,000 Estate Tax Exemption for non-Residents
For United States permanent citizens and residents, the 2009 estate tax exemption is equivalent to $3,500,000. That implies that estates valued at less than $3,500,000 will not undergo estate tax for decedents dying in 2009. Non-residents, nevertheless, can only move as much as $60,000 without paying an estate tax. Hence, numerous non-residents living in the United States, some just with modest possessions, will leave their heirs with a 45% costs on substantial taxable estates!
If a non-resident has an US Person spouse, they can take benefit of the IRC 2523 unlimited marital reduction, which defers all estate tax up until the death of the 2nd spouse. Many non-residents do not have an US citizen spouse. For those with non-citizen spouses, a Qualified Domestic Trust (“QDOT”) can be developed to make competent transfers to one’s partner to decrease or get rid of the estate tax bill. Together with a Credit Shelter Trust that reserves the $60,000 exemption quantity, the QDOT can be an effective planning strategy. Upon his or her death, the non-Citizen partner will still leave their beneficiaries with a big taxable estate.
Third Trap: Gift Tax on taxable transfers
Non citizens can not make any “taxable transfers” for gift-tax purposes without incurring a gift tax. IRC 2102, 2106(a)( 3 ), 2505. However, they ought to keep in mind that they can take advantage of gift-tax exclusions, such as the IRC 2503(b) yearly exclusion, and the special IRC 2523(i) for non citizen spouses.
Also, the kind of property will make a difference on whether a taxable transfer goes through present tax. For non-resident non-domicilaries, just those properties concerned to be located within the United States are subject to gift tax. Gifts of intangible possessions, on the other hand, will not go through present tax. Why is that important? Since shares of stock are thought about intangible properties, they may be transferred in certain scenarios without setting off any present tax. Non-residents should examine which properties will undergo gift tax in order to plan accordingly.
Conclusion: Be Prepared
Non-residents need to look for education in order to lessen an unfavorable level of direct exposure to transfer tax both now and upon their death. Consulting with an estate planning lawyer who deals with worldwide clients can help alleviate these and other problems.
This article is intended to offer basic information about estate planning methods and need to not be trusted as a replacement for legal recommendations from a certified lawyer. Treasury guidelines need a disclaimer that to the extent this post issues tax matters, it is not planned to be utilized and can not be utilized by a taxpayer for the purpose of avoiding penalties that might be imposed by law.