Taxation of Assets at Death: U.S. Taxpayers and Nonresidents
As Coronavirus cases surge across the world claiming lives, the international clients who reside overseas but maintain assets and interests in the United States, must be prepared to determine which country has the legal right to collect taxes upon the death of a loved one. This can be a daunting process.
Taxation of US assets at death for U.S. taxpayers or nonresidents
U.S. citizens and others domiciled in the United States (known as U.S. taxpayers) are subject to U.S. estate tax on the value of the assets worldwide when they die. However, there is an exemption that excludes most U.S. taxpayers’ estates from owing tax. For U.S. taxpayers, estate tax and gift tax are linked through an exemption known as the lifetime exemption amount. During one year let us say the year 2020, if the value of a U.S. taxpayer decedent’s estate at death plus the total gifts made by the decedent during her or his life exceed a total of US$11.58 million, then the excess in the decedent’s estate is subject to 40% taxation. Annual exclusions for gifts up to $15,000 as well as special rules for spousal combined exemptions and the marital deduction, can change or increase this number.
For nonresidents taxed on asset property in the U.S. at death the situation is different. Nonresidents only enjoy a $60,000 estate tax exemption, while many foreign nationals own a diverse portfolio of assets in the United States including shares in U.S. corporations, tangible property and real estate. U.S. bank accounts, however, are not subject to the estate tax.
Who is a U.S. taxpayer or a nonresident?
To determine the tax rates of assets at death, it is important to first understand who is a U.S. taxpayer or a nonresident alien. The determination of whether a person is a U.S. taxpayer or a nonresident for estate tax purposes is established by where the person is domiciled.
Domicile is a concept that lawyers and courts in the United States toss around often, but the meaning of “what is a domicile” is not clear for many people. A domicile is defined as the jurisdiction where the person lives and has no present intention of leaving and determining the domicile depends on the evidence the person has to show that the it is a permanent place of residence. Whether or not an individual is a U.S. domiciliary at death is significant, as a U.S. domiciliary is subject to estate tax on worldwide assets with a large exemption while a non-U.S. domiciliary is only taxed on the value of U.S.-situs assets with a very low exemption.
The concept of domicile varies across jurisdictions and is determines which country has the right to tax assets at death. The United States has 15 estate tax treaty with other countries. The main concept for the purpose of estate tax is fiscal domicile of the individual. Fiscal domicile is decided based on the following criteria:
- Permanent Home. Continuous availability and control over the dwelling to the taxpayer is relevant, while taxpayer intent is not. A vacation home owned and not rented should therefore qualify as a permanent home, and it is reasonable that a person could have a permanent home in two or more jurisdictions. In some European jurisdictions, the home in which a decedent’s family resides may be weighed more heavily than the decedent’s professional interests. A person might also have no permanent home, such as a person who works abroad out of hotels and rents out his or her prior residence.
- Center of Vital Interests: If the decedent had permanent homes in two countries, facts and circumstances regarding the decedent’s personal and economic relations are considered next. Some factors weighed are where children attend school, business locations, social club and religious memberships, where cars are licensed, and even where pets live.
- Habitual Abode: If the center of vital interests test is nondeterminative, or if the decedent does not maintain a permanent home in any jurisdiction, frequency of time spent in a particular jurisdiction becomes the key factor.
- Citizenship: If still no determination is made as to domicile, citizenship of the decedent will control where the decedent is ultimately domiciled, or failing that, the competent authorities of the conflicting jurisdictions will negotiate a mutual agreement.
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