Don’t Overlook International Estate and Gift Tax Treaties Kevin J. Moore, Esq. October 23, 2017
Agenda • Overview of Estate and Gift Taxation of Foreign Persons • Application of Estate and Gift Tax Treaties • Practical Examples 2
16 Countries That Have Estate and Gift Tax Treaties • Australia • Italy • Austria* • Japan* • Denmark* • Netherlands • Finland • Norway • France* • South Africa • Germany* • Sweden* • Greece • Switzerland • Ireland • United Kingdom* * Combined Estate and Gift Tax Treaty 3
Part I Overview of Estate and Gift Taxation of Foreign Persons 4
1. Are You a Non‐Resident Alien?
2. Estate and Gift Tax Applies Only to US Situs Assets 6
Real Property Located in U.S. 7
Shares of Stock Certificate U.S. Stock 8
Tangible Personal Property 9
Intangible Property • Exempt from gift tax, but not estate tax • Partnership Interests – Probably exempt from gift tax, but IRS might dispute this‐‐See Revenue Ruling 91‐32. Also, will not issue ruling or determination letter on this issue – For estate tax purposes, partnership interest is US situs property if not a separate legal entity, dissolves on death of partner, and underlying assets are US property 10
Exempt US Property • US Bank Accounts (not to be confused with Cash) • Life Insurance Proceeds on an NRA • Debt Obligations of US Persons 11
Situs of Property Gift Tax Estate tax Real US Property √ √ Shares U.S. Stocks √ Tangible Personal Property √ √ Intangible Personal Property √ 12
3. Credits, Deductions and Exclusions • $60,000 estate tax exemption ($13,000 credit) ‐ Does not apply to lifetime gifts • Annual gift tax exclusion (but no gift splitting). • No marital deduction to NRA spouse unless QDT (can get marital deduction if spouse is US citizen) • Annual gifts of $149,000 to NRA spouse (indexed for inflation). • Entitled to pro rata deduction for funeral and administrative expenses, claims, debts, etc. – Numerator = total value of US property and denominator = total value of all worldwide property – Can deduct 100% of non‐recourse debt secured by US property
Part II Application of Estate and Gift Tax Treaties 14
1 . Domicile • Domicile rules are not simply based on citizenship or nationality, but rather on a variety of subjective factors • Advantage of domicile rules include: – NRAs who are residents of a treaty country can establish themselves in the US for a period of time without fear that they will be subject to the US estate and gift tax system. – If NRAs are domiciled in a treaty country per the rules of the particular treaty, then the US estate and gift tax system does not apply and the estate and gift taxation of NRAs is altered by the particular treaty provisions.
2 . US/German Estate and Gift Tax Treaty Overrides • US property subject to estate and gift tax: – Real property, property used in US business, partnership interest which owns US real property or property used in US business • US property not subject to estate and gift tax: – Cash, tangible personal property (unless US business), debt obligations, shares of US corporations , intangible personal property (unless partnership interest per above) • Pro rata estate tax exemption – Numerator = total value of US property and denominator = total value of all worldwide property – Does not apply to lifetime gifts • Marital deduction – Lifetime or testamentary transfer to an NRA spouse or surviving spouse to the extent value of transfer does not exceed 50% of value of all US property – Testamentary transfer to NRA/German surviving spouse not to exceed the unified credit amount (after the 50% exclusion per the above) • 100% deductions of debts that are secured by or relate to US property regardless of whether recourse or non‐recourse
3 . US/UK Estate and Gift Tax Treaty Overrides • US property subject to estate and gift tax: – Real property, and property used in US business (note: no specific inclusion of partnership interest language like in US/German treaty) • US property not subject to estate and gift tax: – Cash, tangible personal property (unless US business), debt obligations, shares of US corporations , intangible personal property (should be able to exclude partnership interest from gift tax as an intangible – may be able to exclude partnership interest from estate tax) • No provisions to provide for pro rata estate tax exemption, HOWEVER: – Personal representative of UK decedent can elect to treat the decedent as if domiciled in the US immediately prior to death • No provisions to alter the marital deduction • No provisions to alter pro rata deductions of debts even if secured by or related to US property (still have non‐recourse alternative)
Part III Practical Examples 18
Planning Considerations • Investor Characteristics • Income Tax Consequences • Investment Characteristics – Use: Personal, Investment – Income generating? – Exit Strategy – Donative Intent – Confidentiality – File Tax Returns 19
Scenario 1: Direct Investment By NRA • Chinese NRA – Estate/Gift taxes apply at 40% – May purchase term insurance to ameliorate risk – May use non‐recourse debt to reduce value – Use of US DRE for asset protection purposes and to possibly avoid gift tax due to intangible exception • German NRA – Estate/Gift taxes apply at 40% – May purchase term insurance to ameliorate risk – May use recourse debt to reduce value – Use of US DRE for asset protection purposes and to possibly avoid gift tax due to intangible exception • UK NRA – Estate/Gift taxes apply at 40% – May purchase term insurance to ameliorate risk – May use recourse debt to reduce value – Use of US DRE for asset protection purposes and to possibly avoid gift tax due to intangible exception
Scenario 2 Direct Invest By Foreign Individual Using Recourse Debt • Property acquired for $4 million with $2.5 million of Recourse debt • Value doubles to $8 million • Recourse debt increases to $6 million when foreign individual passes
Scenario 2 Direct Investment By Foreign Individual Using Recourse Debt • Chinese NRA – Estate/Gift taxes apply at 40% (can not deduct full $6 million recourse debt) • German NRA – Estate/Gift taxes apply at 40% of net equity in property or $800k • UK NRA – Estate/Gift taxes apply at 40% (can not deduct full $6 million recourse debt)
Scenario 3 Investment by FI Through Domestic Partnership U.S. Partnership or LLC treated as a partnership
Scenario 3 Investment by FI Through Domestic Partnership • Chinese NRA – Estate/Gift taxes apply at 40% except gift of partnership interest might be exempt from gift tax as intangible property • German NRA – Estate/Gift taxes apply at 40% (no exception to partnership interest per treaty) • UK NRA – Estate/Gift taxes apply at 40% except gift of partnership interest might be exempt from gift tax as intangible property
Scenario 4 Investment by FI Through Foreign Partnership Foreign Partnership or other entity treated as a Partnership
Scenario 4 Investment by FI Through Foreign Partnership • Chinese NRA – Gift of partnership interest might be exempt from gift tax as intangible property and for estate tax purposes partnership interest may not be considered US situs property • German NRA – Estate/Gift taxes apply at 40% (look through to underlying assets) • UK NRA – Gift of partnership interest might be exempt from gift tax as intangible property and for estate tax purposes partnership interest may not be considered US situs property
Scenario 5 Investment by FI Through Foreign Corporation Foreign Corporation
Scenario 5 Investment by FI Through Foreign Corporation • Chinese NRA – No estate/gift tax consequences • German NRA – No estate/gift taxes consequences • UK NRA – No estate/gift tax consequences
Scenario 6 Investment by FI Through Domestic Corporation Domestic Corporation
Scenario 6 Investment by FI Through Domestic Corporation • Chinese NRA – No gift tax – Estate tax applies at 40% • German NRA – No estate/gift tax consequences (Don’t need foreign corp) • Can not elect Subchapter S status • No capital gains treatment • UK NRA – No estate/gift tax consequences (Don’t need foreign corp) • Can not elect Subchapter S status • No capital gains treatment
Scenario 7 Investment by FI Through Foreign and Domestic Corporation Foreign Corporation Domestic Corporation
Scenario 7 Investment by FI through Foreign and Domestic Corporation • Chinese NRA – No estate/gift tax consequences • German NRA – No estate/gift tax consequences • Don’t need the foreign corp to achieve estate and gift tax savings • UK NRA – No estate/gift tax consequences • Don’t need the foreign corp to achieve estate and gift tax savings
For Further Information Kevin J. Moore kmoore@kjmlaw.com 301 East Colorado Blvd. Suite 600 Pasadena, CA 91101 (626) 586‐9300 33
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