Estate Planning Strategies for Non-citizen Residents

Tax Professionals' Resource
January 15, 2013 — 1,667 views  
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In the United States, the laws pertaining to estate planning are different for citizens and non-citizen residents. So, it is important for an estate planner to be aware of the rules that impact the planning strategies of clients who are non-citizen residents of the country. Lack of awareness of the concerned rules can cause a non-US citizen to suffer huge tax losses.

Estate Tax for Non-citizen Residents

The estate tax rules for a non-US citizen are different from the rules that apply to the citizens of the country. For the purpose of estate tax calculation, a non-citizen can be considered as either domiciliary or non-domiciliary.

An individual will come under the domicile category if he or she is currently living in the US and has no intent to leave the country at a later stage. The estate tax rule which is imposed on a domiciliary is the same as the one which is imposed on an US citizen. To determine if an individual is a domiciliary or not, he/she has to make his intent of stay clear. A domiciliary status will be given to a person only after the concerned authorities study all the relevant circumstances and facts.

A foreign citizen who lives outside the US is considered as non-domiciliary. But he/she can be subjected to US estate tax rules to some extent. This tax is applicable to the person’s estates or properties which are in the US. The non-domiciliary is liable to pay taxes even if the concerned property in the US is a not an income-producing one.

Some estates of the non-resident, which come under multiple jurisdictions and are included as a foreign source income for the purpose of income tax, can be considered for the purpose of estate tax calculation. These include stocks in US corporations, debt obligations of a person, tangible personal estates located in the US, and US real property. The estate taxes are also applicable to some properties which have no connection to the U.S. This will include a stock which is purchased within the country and is transferred to an offshore trust which is revocable. The estate tax laws can only be applicable to international properties of a non-domiciliary.

Different Laws

The tax rules for estates for an US domiciliary are different from that of a non-domiciliary. As per the IRS rules, a domiciliary can make bequests of 2 million dollars, which is free of estate tax, to charities and to people other than their spouses. But, a non-domiciliary is allowed to pass on only 60,000 dollars to the said beneficiaries. A non-domiciliary should also take the required legal steps so that the amount which is passed to the spouse will not be counted against this limit.

Tax Planning

A non-domiciliary who owns a property within the US should consider the option of eliminating taxation by changing the situs of the concerned property. This strategy usually involves including offshore holding companies involved in international trade. This strategy will help to eliminate the doubts and uncertainties regarding properties which come under multiple jurisdictions.

Non-citizens who are about to become US domiciliary should transfer a portion of their trust to a specifically designed irrevocable trust. Based on the trust type, one can not only eliminate estate taxation but also avoid the income tax on the properties which are held by the trust.

Tax Professionals' Resource