Advising citizens, resident aliens and non-resident aliens
By Russell E. Towers, JD, CLU, ChFCMr. Towers is Vice President for Business & Estate Planning with Brokers’ Service Marketing Group, Providence, RI. Connect with him at [email protected]
Sometimes you will find yourself dealing with clients who are U.S. citizens, but who own property in more than one country. Or you may find yourself dealing with a client who resides in the U.S. and has resident alien “green card” status. Or you may have a client who is a citizen of a foreign country, but who owns property “sited” in the U.S.
Is there a simple way to categorize individuals based on their legal status when planning the transfer of their estate for U.S. estate tax purposes? Actually, it is simple because a person can only fall within one of three legal status categories at any given time:
1. U.S. Citizen: Worldwide property owned by a U.S. citizen in included in the U.S. gross estate. The federal estate tax exemption (currently $5,250,000 in 2013) would be in effect. There is a federal estate tax credit for any death taxes paid to foreign countries where an estate tax treaty exists between the U.S. and that foreign country.
2. U.S. Resident Alien (Non-Citizen): Worldwide property owned by a U.S. Resident Alien (“green card”) is included in the U.S. gross estate. The federal estate tax exemption (currently $5,250,000 in 2013) would be in effect. There is a federal estate tax credit for any death taxes paid to foreign countries where an estate tax treaty exists between the U.S. and that foreign country.
3. Non-Resident Alien (Non-Citizen): Only U.S. “situs” property owned by a Non-Resident Alien is included in the U.S. gross estate. The estate tax exemption for Non-Resident Aliens is only $60,000 which is equivalent to a $13,000 estate tax credit (IRC Section 2102(b)).
As you can see above, category #1 ((U.S. Citizen) and category #2 (U.S. Resident Alien-Green Card) are virtually identical. There is a major exception regarding the use of the estate tax marital deduction on the first death of a married couple. In order to receive a 100% estate tax marital deduction on the first death, a special trust known as a “Qualified Domestic Trust” (Q-DOT) must be executed to hold and receive property. Otherwise, any property left outright to a surviving spouse who is a U.S. Resident Alien will not qualify for the estate tax marital deduction and may result in federal estate taxes due upon the first death.
So, the major difference involves category #3 (Non-Resident Alien). Therefore, we have to determine what is considered to be U.S. “situs” property for a Non-Resident Alien that would be included in the U.S. gross estate. And we have to determine what is considered to be property “not situated” in the U.S. gross estate and therefore not included in the U.S. gross estate of a Non-Resident Alien.
Here is a listing of different types of property that would be considered to be U.S. “sited” property and includible in the U.S. gross estate for a Non-Resident Alien:
- Real estate located in the U.S. (Treasury Regulations 20.2104-1(a)(1))
- Stocks (including mutual fund shares and shares of a closely held business) issued by a U.S. corporation (IRC Section 2104(a) and Treasury Regulations.)
- Bonds (debt obligations) issued by a U.S. corporation, by the U.S. government, a State government, or any political subdivision (county, city, or town) (IRC Section 2104(c) and Treasury Regulations)
- Intangible personal property. It is unclear how non-qualified annuities issued by a U.S. carrier would be treated. Treasury Regulation 20.2104-1(a)(4) would seem to suggest that annuities are intangible personal property and are an obligation enforceable against a domestic corporation (i.e. insurance carrier) and should be included in the gross estate. However, in PLR 200842013, the IRS ruled that annuities were not property situated in the U.S. under IRC Section 2105 and should be excluded from the U.S. gross estate of a Non-Resident Alien.
Here is a listing of certain property that would NOT be considered to be U.S. “sited” property and NOT includible in the U.S. gross estate for a Non-Resident Alien:
- Death proceeds of life insurance which includes life insurance issued by a U.S. carrier! (IRC Section 2105(a) and Treasury Regulations). The Non-Resident Alien could even be the outright owner of the policy on his/her life and none of the death proceeds would be includible in the U.S. gross estate! There may be no need for an irrevocable life insurance trust.
- Personally owned savings accounts, checking accounts, certificates of deposit of a U.S. bank (IRC Section 2105(b) and Treasury Regulations).
Example of Non-Resident Alien with a U.S. “sited” taxable estate of $1,000,000:
Taxable estate $1,000,000
Tentative Tax 345,800
Estate Tax Credit -13,000
U.S. Estate Tax $332,800
In the simple example shown above, the non-resident alien could buy a U.S. issued life insurance policy from a U.S. insurance carrier to offset estimated U.S. estate taxes. Since life insurance on the life of a non-resident alien is specifically excluded from the U.S. gross estate under IRC Section 2105(a), the non-resident alien could own the policy personally and name a family member as beneficiary. The income tax free death proceeds could be used to offset the U.S. estate tax.
Many individuals have international business dealings. Certain wealthy Non-Resident Aliens may come to the U.S. frequently for those business dealings. An insurance producer with U.S. state insurance licenses can sell U.S. carrier issued life insurance to these Non-Resident Aliens as long as the solicitation, application, and delivery of the policy takes place in the U.S