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Under certain circumstances the United States (“US”) imposes gift, estate, and generation-skipping transfer taxes on gratuitous transfers of property where such property is located in the US. These mentioned “Transfer Taxes” could have a significant impact on persons who aren’t citizens of the US or aren’t domiciled there, so called non-US Persons.
Transfer Taxes are imposed in accordance to the tax status of the donor and the location of assets transferred by the donor, and in this respect, differ from many “inheritance tax” systems. Non-US persons generally do benefit from a small exemption from these Transfer Tax at time of death of USD 60’000. Any US located assets of the deceased which, at the time of death exceeds this exemption, may be subject to the Transfer Taxes. Let’s look at some key factors to bear in mind.
US estate and donation tax could have a significant impact on non-US persons if they hold assets which are located in the US.
For Federal estate tax purposes, the value of the US gross estate of a non-US person consists only of property (including property that is beneficially owned) that is located, or deemed to be located, in the US at the time of his or her death. Let’s look at some examples:
There are also special rules for trusts. For example, if a non-resident decedent is the beneficiary of a non-US trust and has a general testamentary power of appointment over the trust property, which consists of property located in the US (such as shares in a US corporation), such property may fall into the gross taxable US estate of the non-resident deceased.
Similarly, settling a trust (or a foundation in certain instances) with US located assets and retaining a certain level of control over the trust would bring its assets within in the scope of these taxes.
Generally, the estate of a US person passing to a non-US spouse is fully taxable under the Transfer Taxes. Planning opportunities exist to defer or mitigate the estate tax of the US decedent in such case.
The general principles set out above regarding US Estate tax also apply in respect of US federal gift tax, except that does not apply to gifts of intangible property, such as shares in US corporations. A non-US person is subject to federal gift tax on gratuitous transfers, direct or indirect, by a trust or otherwise, of immovable property in the US or other tangible assets located in the US. Non-US persons benefit from the federal annual gift tax exclusion of USD 15’000 (2018) per year per recipient.
The top federal rate for Transfer Taxes is 40%. Depending on the state where the taxable asset is located, additional state Transfer Taxes may apply.
The primary obligation to pay any Transfer Tax due to the US Internal Revenue Service (“IRS”) authorities in the US lies with the executor of the estate of any deceased person. For estates of non-US persons, if no qualified US executor is appointed by the estate of the deceased, then every person in possession of the decedent’s property is required to file an estate tax return and may be liable for any US estate tax due.
The initial deadline to file the necessary tax return and pay US estate taxes upon the passing of a non-US person is 9 months after the date of death. The time frame for the IRS to process an estate tax return is six to nine months. A Transfer Certificate is issued by the IRS to the executor when it is satisfied that the tax imposed upon the deceased estate, if any, has been fully discharged or provided for. It is clear that financial institutions (such as banks and trustees) require a Transfer Certificate from the IRS before they can release the assets to the beneficiaries. Importantly, the beneficiaries who have received assets from a deceased estate where no transfer certificate was obtained may become personally liable for the unpaid Transfer Taxes when they transfer such property to a third party.
Interestingly, the relevant regulations state that banks, trust companies, or other custodians in actual or constructive possession of assets of such a decedent can insure prevention of liability for taxes and penalties only by demanding and receiving Transfer Certificates before the transfer of property of non-US decedents.
Treaties between the US and the country of residence of the non-US decedent could have an impact on the following:
US Transfer Tax considerations may have an impact on income tax and capital gains tax planning in the US as well as the country where the non-US person beneficiary is tax resident.
We can provide a high-level analysis of the applicability of US Transfer Taxes based on your personal situation including end-to-end holistic and cross-border advice, which covers your wealth planning objectives and strategies. We can also assist you with the implementation thereof.
In addition, we can assist executors with the filing of the required US tax return for the estate of a non-US decedent subject to US Transfer Taxes, to obtain the required Transfer Certificate.