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Estate and Gift Tax Rules for Noncitizens

Jan 29 2023

Article Written for:  the CPA Now, PICPA Pennsylvania Institute of Certified Public Accountants 

Although CPA practices commonly handle federal estate and gift tax matters, very few CPAs counsel nonresident noncitizens exposed to these taxes. This blog provides an overview of the international side of U.S. estate and gift taxes.

Since 1977, the U.S. gift tax and the estate tax have been integrated for U.S. citizens and residents. Tax on gifts and estates may be offset by the “unified credit” against both estate and gift taxes. The unified credit “exempts” from taxation the value of property up to the “applicable exclusion amount.” The estate tax covers transfers of wealth at death, and the gift tax is imposed on the value of gifts made during life. Nonresident noncitizens are taxed only on gifts of U.S.-based tangible assets.

For calendar year 2023, the exclusion amount for U.S. citizens and residents is $12.92 million per individual. Tax on lifetime gifts may be offset by the unified credit, but such offsets reduce the credit available at death. Gift or estate tax is owed by U.S. noncitizen residents and citizens if the aggregate value of lifetime gifts exceeds $17,000 per donee per year and all testamentary bequests (i.e., gifts at death) exceeding the unified credit.

Sign post pointing in different directions toward: London, New York, Beijing, and BerlinThe estate tax is imposed on the “gross estate” of U.S. citizens and U.S. noncitizen residents. The gross estate of a U.S. person includes all property, real or personal, tangible or intangible, worldwide.

The rate of tax for both gift tax and estate tax is 40% of the value of property transferred. The rate of estate and gift tax on nonresident noncitizens is the same as that applied to U.S. grantors. If applicable, U.S. estate and gift tax treaties diminish or eliminate the estate and gift tax imposed on noncitizens. In any case, U.S. citizens and residents generally receive a credit for estate tax paid to a foreign country on property subject to the estate tax.

The Internal Revenue Code (IRC) categorizes U.S. noncitizens as “residents” or “nonresidents” regarding the estate and gift taxes. The IRC, however, contains no definition of “resident” or “residency.” Estate tax regulations set the standard for residency as “domicile” in the United States (subjecting the resident to worldwide estate and gift tax exposure).

The regulations state that “a person acquires domicile in a place by living there, for even a brief period of time, with no definite present intention of later removing therefrom.” To establish an individual as domiciled in the United States (i.e., a “resident” for estate and gift tax purposes), two elements must be proven: the first is physical presence in the United States, and the second is the individual’s intent to remain in the United States. As this second element requires a case-by-case examination of intent, categorization can be unpredictable.

U.S. income tax rules for determining residency are distinct from estate tax rules. An individual may, therefore, be a resident for income tax purposes but not for estate tax purposes, and vice versa.

Once domicile is established for estate tax purposes, it is presumed to continue until shown to have changed. If an individual previously established U.S. domicile, the burden will be on the party asserting non-U.S. domicile to prove a change in status.

The estate tax exemption for nonresident noncitizens is only $60,000. A nonresident noncitizen may not apply the $60,000 credit against taxable lifetime gifts. Gift tax is, therefore, due on all lifetime gifts exceeding the $17,000 annual exemption.

Transfers Between Spouses
Gifts to one’s U.S. citizen spouse are not taxable, for both U.S. and non-U.S. grantors. If both spouses are citizens of the United States, either spouse may transfer assets to the other spouse and receive a tax deduction for the entire value of the property transferred. U.S. citizen spouses may therefore delay, until the death of the survivor, the imposition of either the gift tax or the estate tax on spousal transfers. Such transfers may be accomplished during life or at death, and by outright gift or gifts in trust for the benefit of the other spouse.

Only citizens enjoy an unlimited marital deduction (i.e., no tax imposed) for lifetime spousal gifts. If the spouse receiving a lifetime gift is not a U.S. citizen, the gifting spouse may only deduct $175,000 in tax-free spousal gifts during any calendar year. A few U.S. tax treaties include a gift tax marital deduction for transfers to noncitizen spouses. If a treaty applies, the limited annual exclusion may be avoided.

The limitation on lifetime gifts applies even if both spouses are domiciled in the United States at the time of the gift. The domicile of the donor and donee is irrelevant. Annual lifetime gifts to noncitizen spouses are thus taxed on value exceeding $175,000 (adjusted annually for inflation). The limitation on gifts to noncitizen spouses does not limit tax-free gifts by a noncitizen spouse to a U.S. citizen spouse.

A nonresident noncitizen considering U.S. residency generally should make any intended large spousal gifts of foreign property and U.S. intangible property (free of gift tax) before moving to the United States. Once domiciled in the United States, the grantor becomes subject to the gift tax on all assets held worldwide, along with the $175,000 limited deduction on spousal gifts to a noncitizen spouse.

Additional strategies to avoid gift tax on spousal gifts to a foreign spouse by a U.S. spouse include the following:

Making gifts through shared title, as tenants by the entireties (if available) or joint tenancy with rights of survivorship.
Applying, to the extent available, his or her remaining estate and gift tax exclusion.
Deferring the spousal gift until death, with the testamentary transfer made to a qualified domestic trust (QDOT).
Unfortunately, joint titling will only defer transfer tax until the death of the donor spouse, when estate tax is due on all jointly titled U.S. situs assets, unless contributed to a QDOT.

For U.S. couples, the first U.S. citizen spouse to die may leave his or her entire estate to a surviving U.S. citizen spouse without triggering the estate tax (payable on the later death of the surviving spouse). Thus, any estate tax owed by the first spouse to die may be delayed by devising the deceased’s estate to the surviving spouse. This concept is known as the unlimited marital deduction.

A U.S. citizen or resident may also “port” his or her individual exclusion amount (currently $12.92 million) to the surviving spouse. Any exclusion amount not used by the first spouse to die (by lifetime and testamentary nonspousal gifts) may be transferred (or ported) to the qualifying surviving spouse. The total amount of property excluded from the estate tax ($12.92 million multiplied by two, or $25.84 million) may therefore be pooled by U.S. (citizen or resident) spouses and applied against the taxable estate of the second spouse to die.

The unlimited marital deduction (sheltering spousal bequests by a U.S. citizen or resident) is restricted for transfers to a surviving noncitizen spouse. A surviving noncitizen spouse may not generally receive a bequest from a citizen or resident deceased spouse tax-free.

Any U.S. citizen or resident may defer estate tax on testamentary transfers to a noncitizen spouse through a special trust. The grantor spouse must leave his or her estate to a QDOT as a condition to receiving the marital deduction. The fiduciary of the estate must make the QDOT election on the deceased spouse’s estate tax return. In the absence of an estate tax treaty, only through a QDOT may estate tax (on assets held by a U.S. citizen or resident spouse) be deferred until the death of a surviving noncitizen spouse.

Distributions from a QDOT of the trust principal are subject to the estate tax. To qualify for the marital deduction, the deceased’s property must pass either directly to a QDOT before filing the deceased’s estate tax return or from the nonresident noncitizen recipient spouse (to the QDOT) within nine months of the decedent’s death.

To qualify for the marital deduction, the QDOT must be executed under U.S. law, have at least one trustee that is a U.S. citizen or U.S. corporation, and not allow for distributions unless the trustee has the right to withhold tax on transfers from the trust to the surviving noncitizen spouse. Certain other mandatory trustee powers must be included to secure U.S. tax compliance.

Treasury regulations permit a modified “portability” election to be made, which allows a surviving noncitizen spouse to utilize the deceased’s unused estate tax exemption. Estates of nonresident noncitizen spouses may not, however, elect portability.

Rules of administration exempt the QDOT from “foreign trust” status and the associated onerous reporting requirements.

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Gary A. Forster

Gary Forster is the managing partner and co-founder of ForsterBoughman.  His practice includes domestic and international corporate law, asset protection, tax, and estate planning. Gary handles a wide variety of corporate and personal planning matters.  Gary is the author of two books.  In 2013, he wrote Asset Protection for Professionals, Entrepreneurs and Investors, a guide to asset protection strategies for clients and their financial advisors, now in its second edition.  In 2020, he finished the second edition of The U.S. Estate and Gift Tax and the Non-Citizen, which explains how resident and non-resident foreign nationals are impacted by the U.S. Estate and Gift Tax.  Gary writes and lectures nationally to state bar and CPA groups on the topics of asset protection, international tax and corporate law.  He has also instructed classes at the University of Florida (Levin College of Law) and Rollins College (Crummer Graduate School of Business).  Gary’s articles can be found in such publications as the Florida Bar Journal and the American Bar Association’s Probate and Property Magazine.  Gary earned a B.A. from Tufts University, graduating cum laude with majors in Economics and Spanish Literature.  He received his J.D. from the University of Florida College of Law, graduating with honors.  Gary continued his studies as a graduate fellow at the University of Florida College of Law, Masters of Taxation program, earning an LL.M.  His education also includes studies at the University of Madrid, Oxford University and Leiden University in the Netherlands.  Gary is rated AV-Preeminent by Martindale-Hubbell and speaks Spanish fluently.

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