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) 709-2858 or at prarick@raricklaw.com.

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 gene.sulzberger@prs-efg.com or 305.459.5450.

Disclaimer

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.

For decedents dying in 2010, TRA 2010 provides for a default tax rule which leaves an estate and GST tax with a maximum rate of 35% and an applicable exclusion amount of $5 million. Although this is the default rule, the personal representative or executor of an estate can elect out and be treated as if TRA 2010 had not been enacted. Unfortunately, this results in a cost of retaining carryover basis for the transferred assets, and the need to file an election by the personal representative or executor. Therefore, for 2010, estates have two choices: (1) they can pay no estate tax, which leaves the heirs with a carryover basis for inherited assets that have appreciated by more than $1.3 million (plus $3 million for assets going to a surviving spouse) or (2) heirs can claim a stepped-up basis on the inherited assets if the estate pays estate tax at 35% on assets over $5 million.

For decedents dying in 2011 or 2012, TRA 2010 reduces the maximum estate and GST tax rate to 35% (same for gift taxes) and increases the applicable exclusion amount for estate and GST taxes to $5 million. It is important to know that the TRA 2010 has a “portability” provision, which allows the surviving spouse to use his or her deceased spouse’s unused exclusion amount, in addition to the surviving spouse’s own exclusion amount, for lifetime gifts or for transfers at death.

For decedents dying after 2012, TRA 2010 will no longer apply; rather, the provisions of the old law applies (if there is no legislative change), with estates receiving a maximum estate and gift tax rate of 55% and a maximum exclusion amount of $1 million. The “portability” provisions will also not apply, in the absence of any legislative change in the tax years after 2012.

With the new law in effect, this leaves attorneys and clients with a piece of mind of what will occur within these next two years, as opposed to the previous year of 2010.

Take Away Points

1. Most significantly, the new TRA provides only a 2 year window where we have certainty and excellent planning options. After 2012, however, all bets are off. In 2013, absent legislation, the maximum estate, gift and GST tax exemption is scheduled to go back to $1 million.

2. Although TRA 2010 has a “portability” provision of the $5 million estate tax exemption, so that a surviving spouse may use the remaining portion of a deceased spouse’s unused estate tax exemption, relying on portability may be risky as the law may change after 2012.

3. Now that there is a definite plan for the years of 2011 and 2012, this is a good time for your clients to review their estate plan and see how they can best take advantage of the new law.

Your questions or comments are welcome. Contact attorney Phil Rarick at (305) 709-2858 or prarick@raricklaw.com.

Please contact estate planning attorney Phil Rarick at (305) 709-2858 to discuss the potential impact of the bill on you, your family and your business. This bill may open up important planning opportunities for you.

As usual, Congress and the President are waiting until the last minute to compromise.

It they don’t, most people are in for a big tax hike. For example, without an agreement, the estate tax exemption is scheduled to reset with a $1 million exemption and a 55% maximum tax rate on January 1, 2011.

For more on background on this breaking story, check out the Wall Street Journal.

Stay tuned – follow our blog and we will update you with the status of this “death tax”. Unfortunately, one thing looks certain: the “death tax” – like most taxes – will not die!