Individuals who are US citizens and those who are considered domiciled in the US are subject to US estate and gift tax on a worldwide basis.
A person is considered to be domiciled in the US for US estate and gift tax purposes if they live in the US with no present intention of leaving. A facts and circumstances test is used to determine domicile and takes into consideration the following factors (note that this list is not exhaustive):
- Statements of intent (in visa applications, tax returns, wills, etc.);
- Length of US residence;
- Whether the person has a green card (note that whilst status as a green card holder in itself makes an individual resident for income tax purposes, it is only one of the indicative factors for the purposes of estate and gift tax “residence”);
- Style of living in United States and abroad;
- Ties to former country;
- Country of citizenship;
- Location of business interests;
- Place where club and church affiliations, voting registration, and driver licenses are
A person is considered a non-US domiciled alien (NDA) for estate and gift tax purposes if he or she is not considered a domiciliary under the facts and circumstances test described above.
US citizens and domiciliaries
Estate and gift tax rates currently range from 18% to 40%. The rates are the same whether you are a US citizen, US domiciliary or an NDA. The 40% rate is applicable once the value of a taxable estate exceeds $1,000,000.
An exemption amount is available against gift tax and estate tax for US citizens and domiciliaries. In 2020 US citizens and domiciliaries may transfer $11,580,000 free of either US gift or estate tax. Any lifetime usage of the exemption will offset the amount available at death. Please note that the current lifetime exclusion amount is set to be halved for tax years beginning after 31 December 2025 unless extended.
Upon the date of death, the decedent’s estate will receive a “step-up” in basis such that the estate’s and beneficiaries’ basis in the decedent’s assets for US tax purposes will be the fair market value on the date of death (with some exceptions).
Further, there is an annual exclusion available, which exempts up to $15,000 per donee per year of “present interest” gifts from US gift tax. This exclusion is available for gifts made by US citizens, domiciliaries and NDAs (applicable when gift relate to US sited assets). US citizens and domiciliaries can “gift split,” which, in effect, allows a married donor to exclude up to $30,000 per donee per year. However, if either spouse is an NDA, gift splitting is not permitted. The $15,000 annual exclusion amount is increased for gifts to a non-US citizen spouse to $157,000 per year in 2020 (indexed for inflation).
NDAs are subject to US estate and gift tax only in respect of US “situs” assets. A $60,000 applicable exemption amount is available for transfers made at death only. Other than the annual exclusion, there is no exemption amount available for taxable lifetime transfers by NDAs.
For US gift tax purposes US situs is real property and tangible personal property physically located in the US including US real estate, land, art and jewellery and also cash (notes and coins).
For US estate tax purposes intangible assets are also included, i.e. shares in a US company (regardless of where physical share certificates are kept).
Where property is subject to a mortgage or debt of some form, it will be important to establish whether the debt is deductible for estate tax purposes thus leaving the net value chargeable to US estate tax. It is important to assess in these circumstances whether the debtor has recourse to just the US situated property in the event of a default or whether the individual is personally liable for the debt under the terms of the loan. If the latter is true, then the amount of the debt that is deductible is limited to the extent of the ratio of US situated property to worldwide assets. Only if the loan is “non-recourse” in nature (i.e. the debtor only has recourse to the secured asset, not to the wider assets of the individual) will the debt be wholly deductible in determining the value for estate tax purposes.
US person receiving gift from Non-Resident Alien
Please note that even though any non-US sited gift/bequest received by a US person (as defined for income tax purposes) from a Non-Resident Alien is not subject to any gift or estate tax the US person must file form 3520 (Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts) if the person has received either:
- More than $100,000 from an NDA or a non-US estate (including foreign persons related to that NDA or foreign estate) that are treated as gifts or bequests; or
- More than $16,388 from non-US corporations or non-US partnerships (including foreign persons related to such foreign corporations or foreign partnerships) that are treated as gifts.
Foreign tax credits
Depending on where the worldwide assets are located and if the individual is subject to estate and/or gift tax in another jurisdiction foreign tax credit may apply. In general, this is regulated by a double tax treaty or Estate and Gift tax treaty. The purpose of the tax treaty between the countries is to alleviate double taxation on the estates and gifts of citizens and domiciliaries of both countries by modifying the jurisdictional rules of estate and gift taxation with respect to these individuals.
Note that this report does not address estate or gift tax at a State level in the US. Generally, estate and gift taxes are only imposed to the extent that an individual is resident in a particular US State.