Everyone will agree that the world is much smaller now than ever and continues to shrink.

It is becoming more common for Americans who are not otherwise considered wealthy to own assets outside of the US, and conversely, for foreigners to own assets in the US. Will the US get to tax these assets, and if so, how?

This post is the first in a series of blogs about the tax aspects of international estate tax planning.

What is the difference between residents and non-residents?

Perhaps the most obvious place to start is to determine whether you are a US resident or a non-US-resident. If you are a US citizen, this is a straightforward question – you are a resident.

If you are not, there are complexities involved in this question, which are often overlooked. This question, whether you are a resident or a non-resident, will have a tremendous impact on your tax and reporting obligations.

Also, the definition of residency for US income tax purposes differs significantly from the definition of residency for US gift and estate tax purposes. For US income tax purposes, generally, a citizen of another country is considered a US resident based on a couple of objective tests:

  1. The Green Card test looks at whether the individual is a Lawful Permanent Resident for US immigration purposes.
  2. The substantial presence test, which looks at the number of days the person spent in the US

Are you a US Domiciliary?

However, for US gift and estate tax purposes, the terms “resident” or “residency” is supplanted by the term “domiciliary”. It involves a much more subjective analysis. You are deemed to be domiciled in the US if you reside here and have no present intention of leaving. Once the domicile is established, it remains so until it is shown to have changed.

So, is it your intention to stay here forever and die here or are you intending to just stay here for a while, make your money, and leave? An analysis of your particular facts and circumstances needs to be considered, such as:

  1. Time in the US
  2. Location of family and close friends
  3. Location of primary service providers such as doctors, bankers, and financial advisors
  4. Mailing address for sending of dividends, interest, alimony, and other payments
  5. Location of business interests
  6. The jurisdiction where tax returns are filed, and income taxes paid
  7. Representations to the public such as information on stationery and business cards

What are the exemption amounts?

Under the rules for US domiciliaries, there is a lifetime exemption from US gift and estate taxes, as well as the generation-skipping transfer tax, of around $12.06M. For a married couple, this works out to be $24.12M, which is a nice lifetime exemption from gift and estate taxes.

For non-US domiciliaries, the normal $12.12M lifetime exemption becomes zero. A real bummer, right? Instead, there is an estate tax exemption of $60K, which is barely anything.

Like you can maybe buy a car. And the estate tax rates after the exemption amount will range up to 40%.

Of course, for non-US domiciliaries, estate taxes would only apply to US situs property.

Exemptions for gifts to spouses

Now interestingly, if either a US domiciliary or, a non-US domiciliary gives to a US citizen spouse, then there is also something called a marital deduction, and this marital deduction is unlimited. Upon death, you can pass your estate, if to a US citizen spouse, without any estate tax consequences, since there is this unlimited marital deduction.

But again, that’s only for a US citizen spouse. Let’s say my spouse was born in China and immigrated here when she was a toddler; she has a Green Card, but she never got around to getting citizenship, since she want to do jury service and did not care enough to vote – well, that could be a problem – since she isn’t a US citizen, there is no unlimited marital deduction.

In these cases, annual gift-tax-free transfers for $164K can be made to the non-US-citizen spouse. But gifts above this amount, and any bequests at death that are left to the non-US-citizen spouse, are subject to US gift or estate tax.

List of Income/Estate Tax Treaties

Nationals domiciled in countries that have tax treaties with the US might have special tax provisions that can modify these normal rules. So, if you are a national from a treaty country, you need to read your treaty to figure out any special benefits, tax rates, tax exemptions, or deductions that apply to your situation.

For questions, please connect with Daniel Won at [email protected]