Estate Planning for the Non-Citizen Non-Resident
Recently we handled a probate matter wherein the decedent and his spouse, who were both non-citizens and non-residents, owned a home in California. The parents, who lived in China died within just 9 months of each other. When their U.S. citizen children were advised that each parent was only entitled to a $60,000 estate tax exemption and that the estate would be paying nearly $300,000 in estate taxes, they were shocked. They had erroneously thought, like most people, that the very large estate tax exemption of $11.2 million dollars applied to everyone owning property in the U.S., including their Non-Citizen Non-Resident parents. Unfortunately for the children, while Non-Citizen Non-Residents are not given the same preferential treatment as U.S. citizens and residents, their family could have avoided the hefty estate tax through proper pre-death planning.
Many people are aware that the Federal estate tax exemption amounts were doubled in 2018 to $11.2 million per person which will be adjusted upward for inflation each following year. In the new tax law, the gift tax was retained with the same lifetime exemption as the estate tax, the carry-over basis for gifted assets and the step-up in basis for inherited assets were also retained. The new law is set to sunset (end) in the year 2026 – which means that in 2026 the exemptions are scheduled to revert back to the 2017 levels ($5 million-dollar exemption). However, all of the estate tax law summarized here ONLY applies to (a) U.S. Citizens, and/or (b) U.S. Residents (green-card holders).
So, what of the estates belonging to Non-Citizen Non-Residents? The rules are completely different. Instead of the generous $11 million-dollar estate and gift tax exemption per person, the exemption is a mere $60,000. That’s correct, $11 million vs. $60,000. As such, many Non-Citizen Non-Resident individuals’ U.S. based assets will exceed the $60,000 exemption amount and be subject to the top estate tax rate of 40%.
Over the last ten years we have seen a large increase in the number of foreign investors entering the U.S. domestic market making large real property and business investments under the EB-5 visa programs. The majority of these investors are from China. The good news is that the EB-5 program gets the foreign investor a green card so an investor can automatically become a permanent U.S. resident. However, for those people coming to the U.S. for temporary work or to start a business under the H1, L1 and E1 visa programs, a green card is not automatically granted. As such, many retain non-resident status indefinitely.
While often times these skilled workers or their employers retain the services of immigration attorneys to assist the employee through the immigration process, their immigration lawyers do not fully understand the U.S. tax laws as they apply to their clients and how critical it is to consult with an estate planning lawyer. Once their clients obtain their visas, the clients instantly becoming U.S. taxpayers and subject to U.S. tax law.
Thereafter, the Non-Citizen Non-Resident is most likely going to elect to be treated as a resident for tax purposes so as to avoid the 30% mandatory withholding on U.S. derived income. And of course, Non-Citizen Non-Residents can and often do acquire U.S. based assets. This is where the analysis becomes complex. While U.S. citizens and residents are subject to Estate and Gift Tax on their worldwide assets, at least the estate tax exemption is high a t $11 million-dollars. However, for Non-Citizen Non-Resident the exemption is very low at$60,000, and the risk of paying huge taxes upon an unexpected death is high, and perhaps not fully appreciated. But all is not lost because there are planning opportunities that when properly implemented can save the estates of Non-Citizen Non-Residents from significant U.S. estate taxes.
Such pre-planning may include:
Taking advantage of titling property in the name of a U.S. citizen spouse or U.S. entity such as a trust for U.S. citizen children.
Holding title to property in a way as to avoid inclusion. For example, because non-citizens may make a gift of intangible property in any amount, U.S. real property may be transferred to a U.S. legal entity and then transferred to a U.S. trust for the benefit of U.S. relatives. In this way, the Non-Citizen Non-Resident eliminates the risk of dying while holding valuable property.
Obtaining appropriate advice before acquiring property of any kind in the U.S. in the first place. For example, by acquiring property in a foreign corporation or trust if the client has no intention of living in the U.S.
Making sure that all applicable treaty provisions (the U.S. has many estate tax treaties in place to avoid double taxation), have been reviewed to see if they apply.
The added complexity for a Non-Citizen Non-Resident requires expert analysis before a Non-Citizen Non-Resident makes a decision on where to invest their money in the U.S. and how to hold tile to those U.S. assets. The analysis should include: (1) the country of citizenship of the client, (2) the status of the client (are they due to become citizens or residents at some point in the future), (3) the status of the client’s spouse and family (are any of them citizens or residents), (4) the type of property owned (is it real property, tangible personal property or Cash), and (5) the need the client may or may not have with respect to retaining ownership rights in the property.
Moravec, Varga & Mooney is a highly skilled estate planning law firm that can help Non-Citizen Non-Residents navigate the U.S. estate tax laws and help to protect their assets. If you would like to discuss how we can help you or a loved one who may be a Non-Citizen Non-Resident, please give us a call at 626-460-1763 or send us an email.