If you intend on becoming a U.S. Resident Alien or U.S. Citizen in the future, it is important to consider the need to avoid U.S. gift and estate taxes now. Once you become a U.S. Resident Alien or U.S. Citizen for gift and estate tax purposes, many of your estate planning opportunities will be lost forever. Unfortunately, many estate planning attorneys do not have the expertise to handle international estate planning issues and simply apply basic estate planning techniques to every client. As discussed below, international estate planning requires much more than just a simple revocable trust.
U.S. Gift and Estate Taxes for U.S. Resident Aliens vs. Non-Resident Aliens
U.S. Resident Aliens and U.S. Citizens are subject to U.S. gift, estate and generation skipping transfer taxation on their worldwide assets. For example, if you are currently a citizen of China, but obtain your “green card” in the U.S., upon your death, your assets will be subject to U.S. transfer taxes, whether those assets are located in the U.S., China or any other country (subject to any treaties between the countries).
Conversely, a Non-Resident Alien (not a U.S. Resident Alien or U.S. Citizen for gift and estate tax purposes) is subject to U.S. gift, estate and generation skipping transfer taxation on only U.S. situs assets. Thus if you are a citizen of China, and have no green card, upon your death, only your U.S. assets will be subject to U.S. transfer taxes. Your assets in China, or any other country will not be subject to U.S transfer taxes.
Determination of Whether Someone is a U.S. Resident Alien or Non-Resident Alien
Residency for gift and estate tax purposes is determined by domicile. Domicile is defined as where one currently resides or has resided with an intent to live there indefinitely. Domicile is determined by a facts and circumstances test. Some of those factors include duration in the U.S. and declarations made in visa applications. A more detailed analysis of your situation should be done before moving forward with any estate planning vehicles.
The Need for International Estate Planning
Assuming you have significant assets outside of the United States (over $10 million), by becoming a U.S. Resident Alien or U.S. Citizen, you are now subject to estate taxes on all of those assets, as well as any assets in the United States. Becoming a U.S. Resident Alien may be ideal for personal reasons, but from a tax perspective, it may cost you 40% of your net worth. Let’s take a look at an example. Non-Resident Alien owns $20 million of assets in China. Upon the NRA’s death, none of those assets are subject to U.S. estate taxes. However, if the NRA decided to become a U.S. Resident Alien or U.S. Citizen before his or her death, but kept the assets in China, the U.S. would tax those assets as follows: $20,000,000-$5,450,000 (exemption)=$14,550,000 at 40% or $5,820,000 in U.S. estate taxes.
How do you avoid these estate taxes if you decide to become a U.S. Resident Alien or U.S. Citizen? Make a gift! Unfortunately, it is not quite that simple. Read on.
Gifts of Non-U.S. Assets by Non-Resident Aliens
For Non-Resident Aliens that have assets outside of the U.S., you may want to make a gift of those assets to someone else in the form of a domestic or off-shore trust. The trust must be structured to be exempt from U.S. estate tax. There is no U.S. gift tax on gifts of assets located outside of the U.S. to a domestic or off-shore trust. If the trust beneficiary is a U.S. Citizen, there are certain reporting requirements for gifts from a Non-Resident Alien. However, if the trust is structured properly, the trust assets will avoid US estate tax, gift tax and generation skipping tax forever. Even if you do not want to make the gift to someone else, but instead want to make a gift to a trust that benefits you or your spouse, we can structure certain trusts to provide you and your spouse with the same benefits, while also avoiding U.S. estate tax, gift tax and generation skipping tax in perpetuity. Depending on the level of asset protection necessary, those trusts can be set up in various jurisdictions.
Gifts of U.S. Assets by Non-Resident Aliens
Often times, when clients or their advisors come to us, they already own assets in the United States. Gifts of U.S. assets by Non-Resident Aliens are subject to a different set of rules. U.S. gift tax applies to U.S. situs real property and U.S. tangible personal property. U.S. gift tax does not apply to U.S. intangible personal property. LLCs are considered intangible personal property and thus are not subject to U.S. gift tax. Therefore, any gifts of U.S. situs property to the trust should first be converted to intangible property to avoid U.S. gift taxes. Assuming these gifts are made properly, the newly formed trust will now avoid U.S. estate, gift and generation skipping transfer tax.
Timing of Gifts
It is imperative that the gift, whether it be non-U.S. assets or U.S. assets, be made while the donor is a Non-Resident Alien. Once you become a U.S. Resident Alien or a U.S. Citizen, these gifting opportunities are no longer available.
International Estate Planning Attorneys in Orange County
If you, a loved one or a client of yours is a Non-Resident Alien that intends on becoming a U.S. Resident Alien or U.S. citizen, contact John Wong, Orange County International Estate Planning Attorney at Modern Wealth Law to discuss these gifting techniques in more detail.