American LAW

An article on U.S. tax law by one of our american lawyers.


Leigh Alexandra Basha, Attorney

Two certainties in life are death and taxes. Fortunately, with proper planning, you can minimize estate taxes at your death. The first step in estate planning is to determine whether the IRS will treat and tax you as a U.S. citizen, a U.S. resident, or a nonresident alien (NRA) for estate tax purposes. Such a determination will have significant estate tax ramifications. Be aware that even if you are taxed as an NRA for income tax purposes, such as those with G-IV visas, you may still be considered a resident alien for U.S. estate tax purposes. You will be a resident alien for estate tax purposes if you are physically present in the U.S. and intend to remain in the U.S. for an indefinite period of time. With such a subjective test, one can fall easily into the U.S. estate tax trap.

If you are a U.S. citizen or a resident alien, you have a higher unified credit exemption amount ($625,000.00) but you are taxed on your worldwide assets. If you are an NRA, you have only a $60,000.00 exemption, but are only taxed on certain U.S. assets.

Couples will want to take advantage of both spouses’ unified credit exemption amounts. Couples also should ensure that the first spouse to die will use his or her unified credit exemption amount and pass the excess to the surviving spouse using the 100% marital deduction. The 100% marital deduction will not apply for assets passing to a non-U.S. citizen spouse. In such a case, the assets must pass into a qualified domestic trust ("QDOT"). Further, for couples who have dual residency status, such as where one spouse is an NRA and the other is a resident alien with the higher unified credit, it may be preferable to title in the resident alien/U.S. citizen spouse’s name assets which will be exposed to U.S. estate tax (such as U.S. real property). The assets which may not be exposed to U.S. estate tax (such as foreign real property, foreign stocks and bank accounts) should be titled in the name of the NRA spouse.

Another planning opportunity is with life insurance. Life insurance on the life of an NRA is excluded from the NRA’s estate altogether; whereas, with a little planning on the part of a resident alien or U.S. citizen by having life insurance held in an irrevocable life insurance trust, they, too, can also shelter life insurance proceeds from estate tax.

Finally, one should not forget about the cost of probate and what ramifications exist in multiple jurisdictions. Much of that can be solved with a properly drafted trust or will.

All in all, with a bit of planning, one can take advantage of the tax laws and minimize the estate tax hit that will occur at death.

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