International clients living in the United States deal with a number of Estate Planning difficulties. For the negligent, an absence of planning can result in catastrophe. In this post, attorney John C. Martin discusses 4 traps for the unwary migrant who travels through, lives, or operates in the United Sates.
Estate Planning for International Clients: Three Traps for the Unwary
International clients residing in the United States deal with a number of Estate Planning challenges. For the negligent, an absence of planning can result in catastrophe. In this short article, the author goes over 3 traps for the negligent expatriate who passes 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 citizens are unsure whether they will be subject to various type of tax, and at what quantity. Possibly a nonresident working on an organisation visa pays income tax on their around the world profits, and reckons that they for that reason are treated the same as an US resident for all other kinds of tax. Incorrect. The guidelines subjecting one to earnings tax vary from those for transfer tax. A person has to pay income tax if they satisfy among the following tests:
( 1 )She Or He has a green card (is a legal irreversible local);
On the other hand, an individual is subject transfer tax based on a much various test. What is transfer tax? Transfer tax consists of the many types of taxes that Estate Planning attorneys are hired to lower or eliminate. They include present tax, estate tax, and generation skipping 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 be subject to move tax? The internal income code, area 2001(a), supplies that a “tax is hereby imposed on the transfer of the taxable estate of every decedent who is a citizen or local of the United States.” However a “resident” for income tax functions, gone over above, is various from a “resident” for transfer tax purposes. The more crucial concern for transfer tax functions is whether one is domiciled in the nation. To be domiciled in the United States:
( 1 )The person must plan to completely reside in the United States;
Does this mean that a person who maintains a home in the United States might not be domiciled there for transfer tax purposes? Yes. If the specific meant to return to their native land, which truth could be clearly demonstrated by the facts and circumstances, then the Internal Revenue Service may think about the person to be domiciled in their native land. As we will see below, this decision is very important for the kinds of tax that can be troubled transfers and at what quantity.
Second Trap: The $60,000 Estate Tax Exemption for non-Residents
For United States irreversible residents and residents, the 2009 estate tax exemption amounts to $3,500,000. That indicates that estates valued at less than $3,500,000 will not be subject to estate tax for decedents dying in 2009. Non-residents, nevertheless, can just move as much as $60,000 without paying an estate tax. Hence, numerous non-residents residing in the United States, some just with modest assets, will leave their successors with a 45% bill on substantial taxable estates!
If a non-resident has a United States Citizen partner, they can make the most of the IRC 2523 unrestricted marital reduction, which delays all estate tax up until the death of the second spouse. Numerous non-residents do not have a United States person spouse. For those with non-citizen partners, a Qualified Domestic Trust (“QDOT”) can be established to make certified transfers to one’s spouse to minimize or eliminate the estate tax bill. Together with a Credit Shelter Trust that reserves the $60,000 exemption amount, the QDOT can be a powerful planning method. Upon his or her death, the non-Citizen partner will still leave their beneficiaries with a large taxable estate.
Third Trap: Present Tax on taxable transfers
Non citizens can not make any “taxable transfers” for gift-tax purposes without sustaining a present tax. IRC 2102, 2106(a)( 3 ), 2505. However, they ought to bear in mind that they can take advantage of gift-tax exclusions, such as the IRC 2503(b) yearly exclusion, and the unique IRC 2523(i) for non resident spouses.
Also, the kind of property will make a difference on whether a taxable transfer undergoes gift tax. For non-resident non-domicilaries, just those assets regarded to be situated within the United States undergo gift tax. Presents of intangible properties, on the other hand, will not be subject to gift tax. Why is that essential? Given that shares of stock are thought about intangible properties, they may be moved in certain situations without setting off any gift tax. Non-residents must evaluate which properties will be subject to present tax in order to plan accordingly.
Conclusion: Be Prepared
Non-residents must seek education in order to minimize an unfavorable 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 meant to supply general info about estate planning techniques and need to not be trusted as an alternative for legal recommendations from a qualified lawyer. Treasury guidelines require a disclaimer that to the level this post issues tax matters, it is not meant to be used and can not be used by a taxpayer for the purpose of avoiding penalties that may be enforced by law.