Non-Citizen Estate Planning FAQ

Is it possible for a person to have different residency classifications for different taxes?

Yes it is. There is a hard and fast rule for determining residency for income tax purposes while there is a “facts and circumstances” rule for estate tax purposes. The different rules mean that a person can be classified as a non U.S. resident for income tax but as US resident for estate tax.

When is a non US citizen considered resident for estate tax purpose?

The IRS applies the “facts and circumstances” rules, meaning that a person has the intent to permanently reside in the US showed by certain facts such as a purchase of  a main residence in the US, location of close family members, certain of activity, execution of estate planning documents, etc..

Why does residency matter?

When an individual is qualified as US resident for estate tax purposes, the individual is treated like a US citizen for gifts and estate tax meaning that the individual will be taxed on his/her worldwide assets while a foreigner who is not a US resident will be taxed on the US assets only at a different tax rate and with the very small tax exemption of $60 000.

Do I have to report overseas income in the U.S.?

If you are considered a US resident or a US citizen you have to report your overseas income.

What if I pay tax on that money in another country?

There are many international treaties designed to prevent double taxation so it is likely you will not have to pay tax twice however, you still have an obligation to report.

What if the details of my overseas income are not available in time to file my U.S. taxes?

You will have to file an extension for your U.S. taxes so that you can file them accurately.

What if I am no longer a U.S. citizen?

The American Jobs Creation Act of 2004 made substantial changes to the tax information and reporting rules for ex-citizens.  Certain individuals called “covered expatriates” still have to file U.S. tax returns if their citizenship or long term resident status changed after June 3, 2004.

How can I tell if a trust is a U.S. trust or a foreign trust?

The rules for determining this changed significantly in 1996 and again in 1999.  In general a trust is a foreign trust unless a U.S. court can exercise primary supervision over the administration of the trust and one or more U.S. persons have the power to control all of the substantial decisions of the trust.

What if there is no trustee for a period of time?

For a trust where there is some question as to whether it is a U.S. or foreign trust, the trust has 12 months to reassert U.S. control by either a change of trustee or a change in citizenship of a trustee.

Are foreign trusts subject to U.S. taxes?

Generally no, with the exception of U.S. withholding tax on any U.S. sourced income.  A foreign trust that accumulates income will not have to pay any U.S. taxes; however, if it pays that income to a U.S. person, that person will have to pay taxes on the income.

Can a non-U.S. person be the grantor of a U.S. trust?

Generally no, if a non-U.S. person sets up a trust for the benefit of a U.S. person, the U.S. person will be taxed on the income received.

Are there penalties for accumulating income in a non-U.S. trust?

Yes, if a trust distributes income to a beneficiary in a year other than the one it is earned in the beneficiary will have to pay taxes on that income. In addition, IRS counts the due date of any tax on that income as being in the year it was earned. Thus, taxes on income that is not distributed in the year it is earned will have a tax penalty running from the date it would have been paid.

Are there ways to avoid these penalties?

Yes, one way is to create a U.S. trust that is a subsidiary of the foreign trust to receive capital gains or accumulated income.

Who is a resident for U.S. estate tax purposes?

A person whose primary residence, or domicile, is in the United States.

What assets are estate taxes levied on?

Worldwide assets. There are international treaties similar to the ones for income tax purposes to limit double taxation for estate tax.

What if I am not a U.S. resident but I own assets in the U.S.?

You will only have to pay estate tax on those assets located in the United States.

Is there specific tax treatment for a non-citizen spouse?

Yes.  The non-citizen spouse does not have the benefit of the unlimited marital deduction. In addition the non-citizen does not benefit of the presumption that joint property is owned 50% by each spouse.  The non-citizen spouse will have to prove his/her contribution in the joint property.

What alternatives are available to the non-citizen spouse?

Alternative 1: If the inherited assets are titled into a special trust called Qualified Domestic Trust (QDT), the payment of estate tax is postponed until the assets are distributed from the trust.  A QDT requires that one trustee is a US citizen.

Alternative 2:  A special annual exemption of $136 000 is available instead of the standard annual exemption of $13 000.  With this special exemption, an asset protection/tax planning is available through the funding of life insurance trust (ILIT).

Is an international will different from any other will?

Yes.  To be in compliance with the International Convention of 1973 in Washington, DC, a testament will be an international will if  the testator signs all pages of the will in the presence of  two witnesses, a notary public, and an attorney.  A certificate completed by the attorney who drafted the will shall be attached to the will.

Can I name guardians for my minors children in a will?

Yes.  If the names guardians live overseas, I suggest that you also name temporary local guardians in order to give time for the overseas guardians to apply for visas and make arrangements for coming.

My family is dependent on my visa, what happen if I die?

Upon your death, your family members will lose their visa status.  One solution is to name your spouse executor of your estate.  Your spouse will be entitled to apply for a business visa in order to wind up the estate.

Can I name my spouse executor/personal representative of my estate?

Yes and you should in order for your spouse to apply of a visa.

Can I name an overseas family member as executor of my estate?

Certain state laws do not allow a non-citizen to be appointed executor of an estate unless the non-citizen is a surviving spouse.  Other state do not have limitation however, the non-citizen often cannot be bonded.  To summarize, it is better to appoint  a US citizen.