Estate Planning for International Customers: 3 Traps for the Unwary
International customers living in the United States face a number of Estate Planning obstacles. For the negligent, a lack of planning can lead to disaster. In this short article, attorney John C. Martin goes over four traps for the negligent migrant who passes through, lives, or works in the United Sates.
Estate Planning for International Clients: 3 Traps for the Unwary
International customers living in the United States deal with a variety of Estate Planning difficulties. For the negligent, an absence of planning can cause catastrophe. In this short article, the author goes over 3 traps for the unwary migrant who travels through, lives, or operates in the United States.
First Trap: It’s Not What you Know, it’s What you Do not Know
Often times, non-US residents are unpredictable whether they will be subject to various kinds of tax, and at what quantity. Perhaps a nonresident working on a business visa pays income tax on their around the world incomes, and reckons that they therefore are dealt with the like a United States person for all other types of tax. Incorrect. The guidelines subjecting one to earnings tax differ from those for transfer tax. An individual needs to pay income tax if they fulfill one of the following tests:
( 1 )He or she has a permit (is a legal irreversible homeowner);
On the other hand, a person is subject transfer tax based upon a much different test. What is transfer tax? Transfer tax includes the numerous types of taxes that Estate Planning lawyers are worked with to minimize or get rid of. They consist of present tax, estate tax, and generation avoiding transfer tax (GSTT). Capital gains tax is not a “transfer tax,” however it often enters play when a transfer of assets is made. Who will go through transfer tax? The internal profits code, section 2001(a), provides that a “tax is thus troubled the transfer of the taxable estate of every decedent who is a resident or local of the United States.” But a “resident” for income tax purposes, discussed above, is different from a “resident” for transfer tax purposes. The more essential 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 completely reside in the United States;
Does this mean that an individual who keeps a house in the United States might not be domiciled there for transfer tax functions? Yes. If the specific intended to return to their nation of origin, which fact could be plainly shown by the truths and situations, then the IRS may think about the person to be domiciled in their country of origin. As we will see below, this determination is essential for the types of tax that can be troubled transfers and at what amount.
Second Trap: The $60,000 Estate Tax Exemption for non-Residents
For United States irreversible citizens and residents, the 2009 estate tax exemption is equal to $3,500,000. That means 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 up to $60,000 without paying an estate tax. Hence, lots of non-residents residing in the United States, some only with modest properties, will leave their successors with a 45% expense on sizable taxable estates!
If a non-resident has an US Person partner, they can make the most of the IRC 2523 unrestricted marital reduction, which delays all estate tax until the death of the second spouse. Many non-residents do not have a United States person spouse. For those with non-citizen partners, a Qualified Domestic Trust (“QDOT”) can be developed to make competent transfers to one’s partner to reduce or eliminate the estate tax expense. Together with a Credit Shelter Trust that sets aside the $60,000 exemption amount, the QDOT can be a powerful planning method. However, upon his/her death, the non-Citizen partner will still leave their successors with a big taxable estate.
Third Trap: Gift Tax on taxable transfers
Non residents can not make any “taxable transfers” for gift-tax purposes without incurring a gift tax. IRC 2102, 2106(a)( 3 ), 2505. They ought to keep in mind that they can take benefit of gift-tax exemptions, such as the IRC 2503(b) yearly exclusion, and the special IRC 2523(i) for non person partners.
Also, the kind of property will make a distinction on whether a taxable transfer undergoes gift tax. For non-resident non-domicilaries, only those properties concerned to be positioned within the United States are subject to present tax. Gifts of intangible possessions, on the other hand, will not go through present tax. Why is that essential? Considering that shares of stock are thought about intangible assets, they might be transferred in specific circumstances without triggering any gift tax. Non-residents need to evaluate which properties will be subject to gift tax in order to plan accordingly.
Conclusion: Be Prepared
Non-residents need to look for education in order to reduce an undesirable level of exposure to transfer tax both now and upon their death. Consulting with an estate planning lawyer who deals with international clients can assist mitigate these and other problems.
This short article is planned to provide basic information about estate planning strategies and need to not be relied upon as an alternative for legal advice from a qualified lawyer. Treasury regulations need a disclaimer that to the degree this article issues tax matters, it is not planned to be used and can not be utilized by a taxpayer for the function of avoiding charges that might be enforced by law.