Most Americans do not need to pay the gift and estate tax because of the current high exemption amount. However, like the income tax, which we talked about in "How To Reduce U.S. Taxes On Your Foreign Income?" and in "Do You Need To Report Your Foreign Assets?" before, there are also some special rules governing cross-border issues and immigrants regarding the gift and estate tax.
Let’s get some basic understanding of how the gift and estate tax system works in the United States. First of all, the person who gives the gift is usually responsible for filing the gift tax return and paying gift tax. The federal estate tax rate starts at 18% and quickly jumps to the highest 40% for taxable estates over $1,000,000 in 2017. You could find the detailed tax table on page 6 of the document here. Some states also have additional death or inheritance tax. We will focus only on the federal estate tax in this post. For 2017, the annual exclusion applying to gifts is $14,000 and the total applicable exclusion amount for gift and estate tax is $5,490,000. It means that, generally, you can give gifts worth of $14,000 per person per year to anyone without filing gift tax return. And, you are not subject to any gift and estate tax as long as the sum of the gifts you made in your lifetime and your estate is not over $5,490,000. Please be aware of that even though you do not have to pay any gift taxes due to the lifetime applicable exclusion amount, you still need to file Form 709, United States Gift Tax Return, for the year that you give gifts to someone exceeding the annual exclusion amount. Both the annual gift exclusion and the lifetime applicable exclusion amount will be indexed for inflation. In 2018, the amount will be increased to $15,000 and $5,600,000 respectively. In addition, there is an unlimited marital deduction that allows unlimited transfer of assets between you and your spouse without incurring taxes both before and after your death.
Therefore, what are the special rules associated with some common cross-border issues?
You may be subject to estate taxation if you have assets in the U.S. even you are not a U.S. resident.
The definition of a U.S. resident for gift and estate tax purposes is different from the resident alien concept under income tax system. It is not solely based on the days you spend in the U.S. or whether you have a green card. It is based on the concept of “domicile” and it is more subjective. IRS defines domicile as “living within a country with no definite present intent of leaving”. There are many factors being considered to determine whether you are domiciled in the U.S.
In general, if you are a non-U.S. resident and have assets other than bank accounts not used in connection with a trade or business in the U.S., you are subject to U.S. estate taxation. And what makes it even worse is that the applicable exclusion amount for a Non-U.S. resident is only $60,000 rather than $5,490,000.
Planning tips: The most common asset owned by a non-U.S. resident is real estate. Owning real estate in a foreign corporation or a well-structured trust may help you avoid estate taxes. Also, for people who plan to renounce your U.S. citizenship or green card, please plan ahead for any potential estate tax liabilities with the Expatriation Tax together.
You are not eligible for the unlimited marital deduction if your spouse is not a U.S. citizen.
The property you give to your noncitizen spouse before or after your death will be counted toward the applicable exclusion amount. But you can get a $149,000 annual gift exclusion amount for the property you give to your spouse rather than $14,000.
Planning tips: Keep in mind that the percentage of ownership may be counted as a gift when you open a joint account with your noncitizen spouse. You should take advantage of the higher exclusion amount every year if your spouse is not planning to become a U.S. citizen. Or you could consider establishing a Qualified Domestic Trust (QDOT) to qualify for the unlimited marital deduction and avoid the potential estate tax upon your death.
You may need to report the gifts or inheritance you received from a foreign person.
According to the IRS, “you must file Form 3520, if, during the current tax year, you treat the receipt of money or other property above certain amounts as a foreign gift or bequest.
Include on Form 3520:
Gifts or bequests valued at more than $100,000 from a nonresident alien individual or foreign estate (including foreign persons related to that nonresident alien individual or foreign estate);
Gifts valued at more than $15,671 for 2016 (adjusted annually for inflation) from foreign corporations or foreign partnerships (including foreign persons related to the foreign corporations or foreign partnerships).”
You must aggregate gifts received from related parties. For example, if you receive $60,000 from nonresident alien A and $50,000 from nonresident alien B, and you know or have reason to know they are related, you must report the gifts because the total is more than $100,000.”
Planning tips: The filing requirement is for information purpose only. You generally don’t owe any taxes on the gifts or bequests you received from a foreign person unless he/she is considered a “covered expatriate”. Also, the money is generally not counted as gifts if it is paid for qualified tuition or medical expenses on behalf of you.
U.S. tax system is very complicated. Special rules and exceptions are all over the place. Cross-border issues on top of that are even more daunting. As always, I highly recommend you consulting a tax and legal professional for your specific situation.