International Estate Planning Pt. 2

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

What assets are subject to US estate tax?

So far, I’ve used the terms estate tax and gift tax interchangeably, but there are differences. 

The estate tax is assessed on death to your estate, and gift tax is assessed to the living giver, you, while you are alive. 

The list of assets subject to US estate tax if held by a non-US domiciliary is longer than the assets subject to US gift tax. A non-US domiciliary is subject to US estate tax concerning property deemed located in the US, regardless of whether it’s tangible or intangible.  

Assets deemed located in the US for these purposes generally include:

  • US real property holdings
  • US personal property
  • Deposits with a US bank [if connected with a US trade or business, otherwise not]
  • Shares of a US corporation [but not a foreign corporation]

What assets are exempt from US estate tax [assuming these are not effectively connected with a US trade or business}?

  • Deposits with US banks, to encourage foreigners to put money in US banks
  • Shares of foreign corporations, even if US assets are held by the foreign corporation
  • Life insurance proceeds on the life of a non-US domiciliary decedent, thanks to the life insurance lobby
  • US Treasury Notes and other debt obligations eligible for the portfolio interest exemption, again, to encourage foreign investment

For US domiciliaries, everything is taxable. These exemptions relate only to non-US domiciliaries and assume the assets are not effectively connected with a US trade or business.

What assets are subject to US gift taxes?

A non-citizen or non-resident is subject to US gift tax on the transfer of US real property or US tangible personal property. However, gifts of intangible assets are not subject to US gift tax because intangible assets are considered to be located in the home country of the donor.  

Gifts of US corporation shares are also not subject to US gift tax since shares are intangible property. 

Note, however, that these very same shares would be taxable if they came out of the estate of the non-US domiciliary decedent since they are considered US situs assets. So, it’s tricky; non-taxable if it’s a living gift, taxable if it is a gift after death.

Stated differently; if I were a non-citizen or non-resident and make a gift of US tangible property, I’m going to have a taxable gift. If I make a gift of an intangible, that’s not a taxable gift. If I make a gift of an intangible that owns US property, ex., US corporation stock, where the underlying corporate asset is US property, that would be also not subject to gift tax, since the stock is intangible and intangibles are not subject to the gift tax. However, if those US corporation shares pass not as a gift when I am living, but as an inheritance after my death, those shares would be US situs assets, subject to estate tax.  

Taxable or not, the gift recipients, however, may be subject to disclosure requirements. The filing of information return Form 3520 will be necessary if the amount of the gift exceeds $100K in any year. Gifts that are generally free of tax would be taxable and severely penalized if Form 3520 is not filed when required.

What are Gift Tax exclusions?

There is an annual exclusion of $16K per donee on taxable gifts of US property. This annual exclusion, adjusted annually for cost of living, is available to all donors [citizens or non-citizens, residents or non-residents, whoever], for gifts to all donees [relative, friend, stranger, anybody].  

There are quirks. Non-citizens or non-residents are not entitled to the gift splitting election to which US citizens and resident aliens are entitled, in which case the $16K can be doubled to $32K when done by husband and wife.

And, there is an annual exclusion for gifts to non-US citizen spouses of $164K, which tries to make up for the fact that non-citizens can’t benefit from the unlimited marital exclusion available to US citizens, discussed earlier.  

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