Are you, or is your spouse, a non-U.S. citizen? If so, several traditional estate planning techniques won’t be available to you. However, if you’re a U.S. resident, but not a citizen, the IRS treats you similarly to a U.S. citizen.
If you’re considered a resident, you’re subject to federal gift and estate taxes on your worldwide assets, but you also enjoy the benefits of the $5.49 million exemption and the $14,000 annual exclusion. And you can double the annual exclusion to $28,000 through gift-splitting with your spouse, so long as your spouse is a U.S. citizen or resident. Special rules apply to the marital deduction, however.
Residency is a complicated subject. IRS regulations define a U.S. resident for federal estate tax purposes as someone who had his or her domicile in the United States at the time of death. One acquires a domicile in a place by living there, even briefly, with a present intention of making that place a permanent home.
Whether you have your domicile in the United States depends on an analysis of several factors, including the relative time you spend in the United States and abroad, the locations and relative values of your residences and business interests, visa status, community ties, and the location of family members.
Estate tax law for nonresident aliens
If you’re a nonresident alien — that is, if you’re neither a U.S. citizen nor a U.S. resident — there’s good news and bad news in regard to estate tax law. The good news is that you’re subject to U.S. gift and estate taxes only on property that’s “situated” in the United States. Also, you can take advantage of the $14,000 annual exclusion (although you can’t split gifts with your spouse).
The bad news is that your estate tax exemption drops from $5.49 million to a miniscule $60,000, so substantial U.S. property holdings can result in a big estate tax bill. Taxable property includes U.S. real estate as well as tangible personal property (such as cars, boats and artwork) located in the United States.
Determining the location of intangible property — such as stocks, bonds, partnership interests or other equity or debt interests — is more complicated. For example, if a nonresident alien makes a gift of stock in a U.S. corporation, the gift is exempt from U.S. gift tax. But a bequest of that same stock at death is subject to estate tax. On the other hand, a gift of cash on deposit in a U.S. bank is subject to gift tax, while a bequest of the same cash would be exempt from estate tax.
Your estate planning advisor can help you determine which property is situated in the United States and explore strategies for minimizing your tax exposure. For instance, it may be possible to avoid U.S. estate taxes by setting up a foreign corporation to hold U.S. property.
Create a solid plan
Your status as either a U.S. resident or a nonresident alien will affect the estate planning strategies available to you. Your top goal should be to create an estate plan that will minimize estate tax and allow you to pass more on to your loved ones.
For further estate planning resources and information, visit our estate planning page here.
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