Last month’s article discussed the importance of pre-immigration tax planning to minimize U.S. income taxes when moving to the U.S. You should also be alerted to the U.S. transfer (gift and estate) tax consequences when relocating to the U.S. The conclusion was that failure to plan pre-immigration can result in catastrophic tax results!
What are U.S. federal transfer taxes? Taxes imposed when you transfer money or property during your lifetime (for example a gift), or upon your death (using a bequest or devise).
How do U.S. federal transfer taxes apply to U.S. vs. non-U.S. tax residents?
- Non-U.S. Tax Residents: Gratuitous transfers of U.S. situs property only during life and at death are subject to maximum federal transfer tax rates of 40% in 2016. Non-U.S. tax residents are entitled only to a $60,000 exclusion.
- US. Tax Residents: Gratuitous transfers of worldwide property during life and at death are subject to maximum federal transfer tax rates of 40% in 2016. U.S. tax residents, however, have an aggregate lifetime exclusion amount of $5,450,000 in 2016.
How do you become a U.S. resident for transfer tax purposes? The test for determining U.S. transfer tax residency depends on the subjective notion of “domicile”. U.S. domicile is established when physical presence is coupled with the requisite intent to remain indefinitely in the U.S. manifested through lifestyle related facts. Some factors U.S. courts will examine in determining domicile include, but are not limited to: (i) the type of visa you obtain (immigrant v. non-immigrant), (ii) size, cost, and location of residential properties, (iii) location of family, (iv) purchase of a one way plane ticket, etc.
What are the key planning objectives to minimize U.S. transfer tax exposure?
- Remain a non-U.S. transfer tax resident: If your objective is to limit U.S. transfer tax exposure to transfers of U.S. situs assets only, you will need to plan prior to your arrival to ensure you do not establish a new U.S. domicile. As a non-U.S. transfer tax resident, however, you also will need to seek customize tax planning to protect your U.S. situs assets given the severe limitations on credits, deductions, and exclusions (i.e., limited to $60,000 exclusion).
For example, the estate or gift tax resulting from the transfer of U.S. real property valued at $1,000,000 and owned directly by a foreign investor could exceed $375,000. This catastrophic result could be minimized (or avoided) with advanced tax planning.
- Become a U.S. transfer tax resident: If you become a U.S. domiciliary, you will be subject to U.S. transfer tax on your global assets, and be entitled to larger credits, deductions, and exclusion, which may result in reduced exposure to U.S. transfer taxes, if your global estate is below the $5,450,000 lifetime exclusion amount. In contrast, if your global estate exceeds $5,450,000, or if below but you expect a future increase in wealth, such as a large gift or inheritance), you should consider pre-immigration estate tax planning strategies aimed to reduce your global estate prior to relocating to the U.S.
When is the best time to start your pre-immigration transfer tax planning?
Before establishing a new U.S. domicile! As a non-U.S. tax resident (foreign domiciliary), the reach of the U.S. transfer tax is limited to transfers of U.S. situs assets only. Therefore, you may take advantage while you are a non-U.S. tax resident to rearrange your foreign affairs free of U.S. transfer taxes. In conjunction with U.S. pre-immigration tax planning strategies, you should also seek tax advice in your foreign home jurisdiction to avoid triggering foreign tax consequences. U.S. gift and estate tax treaties can also impact planning for your arrival (or investments) in the U.S.
Pre-immigration tax planning requires a customized analysis of all the rules and exceptions relating to this subject matter. This article only contains generalities, and in no circumstances should you undertake any action without competent tax advice based on your particular set of facts and circumstances.
Therefore, you may take advantage while you are a non-U.S. tax resident to rearrange your foreign affairs free of U.S. transfer taxes.
Authored By Michael Vandormael
If you are planning to move to the U.S., the tax attorneys at Barbosa Legal can advise you on custom pre-immigration tax planning strategies aimed to preserve your wealth and minimize U.S. income taxes post U.S. relocation, while ensuring compliance of all U.S. tax filing and reporting obligations.
The Barbosa Legal team has ample experience negotiating, drafting, and enforcing all transaction documents and agreement. They assist with planning for future tax implications, creating enforceable transaction contracts, explaining economic conditions and currencies, and the ability to register businesses in multiple countries.
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