US Tax Traps and Possible Solutions for the Non-Resident or Resident Foreign National
By Phillip B. Rarick, Esq. and Gene C. Sulzberger, CFP®, J.D.
In the United States there are multiple estate and gift tax traps if you are not a U.S. citizen or your spouse is not. If you are a non-resident, or a resident with a Green Card and own property in Florida or other parts of the United States, you need to know about these tax traps. U.S. estate and gift taxes are very harsh for the non-resident who has not done the proper planning.
Scenario: A non-resident, non-U.S. Citizen with no Green Card who purchases a $1.5 million house would trigger upon death in 2011 an estate tax of $495,000 and likely probate fees in Florida of at least $15,000.
U.S. citizens in 2011 have a $5 million estate tax exemption upon death; non-resident aliens (“NRAs”) have only a $60,000 exemption. A U.S. citizen at death can give an unlimited amount to his or her U.S. spouse if that spouse is a U.S. citizen using the unlimited marital deduction. However, this unlimited deduction is not available if the surviving spouse holds a Green Card or is a non-resident alien.
Special Note: The IRS has two definitions for residency: one for income tax purposes and one for estate and gift tax purposes. These rules are complex. Tax treaties for certain countries will also impact planning. You should consult an estate planning attorney experienced in off-shore planning for clarification of how these rules and possible treaties apply in to you.
Trap #1: Non-U.S. Resident; Non-U.S. Citizen Owning Florida Real Estate
In the Scenario presented earlier, because the NRA has only the $60,000 exemption, the value of his Florida home over the exemption would be hit with a tax of $495,000 (34.4% tax rate on the balance, assuming no other assets).
Potential Solution: This non-resident needs to consult with an estate planning attorney immediately. A possible option is creating a Florida limited liability corporation (LLC) and a discretionary, irrevocable, off-shore trust. The Florida home is then deeded to the LLC, and the LLC membership interest transferred to the off-shore trust.
Trap #2: U.S. Citizen with a Spouse holding a Green Card
If the U.S. citizen dies first and the surviving spouse holds only a Green Card, then the decedent’s estate could be subject to a 35% estate tax due within nine months of death on all assets owned world-wide over $60,000.
Potential Solution: The decedent may need a special trust for the surviving spouse known as a Qualified Domestic Trust (QDOT). One of the trustees of the QDOT must be a U.S. citizen or a qualified U.S. trust company.
Trap #3: Gifts to Non-Citizen Spouse
Gifts from a U.S. citizen to a non-citizen spouse exceeding the $136,000 annual gift tax exclusion for non-citizen spouses are subject to the U.S. gift tax rate of over 30%.
Potential Solution: Consider consolidating all U.S. properties in a limited partnership (or in Florida a limited liability limited partnership, an LLLP) and gifting each year $136,000 of limited partnership interest to the non-citizen spouse.
Take Away Points:
1. Federal estate and gift tax laws impose onerous restrictions on non-citizens, even if the non-citizen has a Green Card.
2. There are multiple solutions to minimize or avoid estate and gift taxes, but such solutions require planning.
3. A real estate agent or title company cannot tell you the best way to title your property and pass your real estate to your loved ones. You should consult an estate planning attorney experienced in domestic and off-shore planning.
Phillip B. Rarick, Esq. and his law firm Rarick & Associates in Miami Lakes, FL have been concentrating on probate, estate and asset protection planning for their clients for the past 18 years. Mr. Rarick can be reached at (305) 556-5209 or at firstname.lastname@example.org.
Gene C. Sulzberger, CFP®, JD, TEP is a Senior Vice President and Client Relationship Officer at PRS Investment Advisory in Miami, FL. PRS is a 30 year old registered investment advisory firm that provides wealth management for domestic and international clients. Mr. Sulzberger can be reached at email@example.com or 305.459.5450.
The information in this article is of a general nature and is not intended to answer any individual’s legal questions. Do not rely on information presented herein to address your individual legal concerns. If you have a legal question about your individual facts and circumstances, you should consult an attorney that is experienced in Florida estate planning law.