At the American Academy of Estate Planning Attorney’s recent San Diego Summit, I presented a seminar about some of the most common types of issues that lawyers might encounter in international estate planning.
The most basic issue is one of citizenship. Is the person a citizen of the United States? If so, they are subject to U.S. tax laws, including estate and gift tax and income tax, regardless of their country of residence. This is unusual, as most countries do not tax people who are not residents (even non-resident citizens). It is important to note that even if a person is a citizen of the United States, it does not necessarily exclude that person from taxation in another country where he or she may also have citizenship or residence.
However, even if the individual is not a citizen of the U.S., he or she may still be a resident here. For income tax purposes, a resident is a person who had a “substantial presence” in the United States during the calendar year. Under the law, an individual has a “substantial presence” after being present in the United States for at least 31 days in the current year, and 183 days in the 3-year period that includes the current year and the years immediately before that, 1/3 of days present in the first year before the current year, and 1/6 of the days present in the second year before the current year. For estate and gift tax purposes, residency is determined like common law domicile.
After determining a person’s citizenship and residency status, it is important to determine whether there is a treaty in effect for those with citizenship / residence in multiple countries, as it may determine which property may be included in the estate of the person.
The government taxes citizens the same as residents in terms of estate taxation. Presently, the estate tax exclusion is $5.12 million. On the other hand, “non-resident aliens,” those who are neither residents nor citizens of the U.S., have merely a $60,000 exclusion for estate and gift tax purposes. For more information about the potential reversion of the exclusion amounts to pre-2012 rates in 2013, please see my prior blog discussing this here.
Another area of confusion is that of transfers to non-citizen spouses. Transfers to non-citizen spouses must be left in a special Qualified Domestic Trust (“QDOT”) in order to get a marital deduction for the transferring spouse. However, a QDOT is not required if the transferor is utilizing exclusion and, therefore, does not need a marital deduction.
My presentation covered these and many more complex matters on international estate planning.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (800) 846-1555