If a donor or decedent is a U.S. citizen or domiciled in the United States, all gifts made and assets owned worldwide at death are subject to U.S. transfer tax in the absence of a relevant gift or estate tax treaty. In addition, even if a taxpayer has no connection with the United States (i.e., is not a citizen or domiciliary) but passes away owning certain types of property located in the United States, the estate tax applies to the U.S. situs property regardless of the taxpayer’s citizenship or residency, as long as an estate tax treaty does not supersede.
WHAT CREATES U.S. DOMICILE FOR ESTATE AND GIFT TAX PURPOSES?
Treasury regulations explain that a person can establish domicile by living in a place—for even a brief period—with no definite, present intention of moving (Regs. Sec. 20.0-1(b)(1)). “Residence without the requisite intention to remain indefinitely,” on the other hand, “will not suffice to constitute domicile, nor will intention to change domicile effect such a change unless accompanied by actual removal” (Regs. Sec. 20.0-1(b)(1)). This test requires a facts-and-circumstances analysis that looks into a variety of factors, such as citizenship in another country and the location of investment assets, driver’s registration, bank accounts, homes, etc. Domicile is presumed to continue in a foreign jurisdiction until it is established in the United States.
DOMICILE IS SEPARATE FROM INCOME TAX RESIDENCY
Estate and gift tax domicile in the United States is not necessarily the same as income tax residency, so it is possible to acquire income tax residence without becoming domiciled in the United States for estate and gift tax purposes. Income tax residency is based on two criteria: (1) meeting the “substantial presence test” under Sec. 7701(b)(3); or (2) holding a U.S. Green Card—that is, “having been lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with the immigration laws” (Sec. 7701(b)(6)).
As a result of the possibly significant transfer tax issues for wealthy international clients who interact with the United States through visiting, purchasing a home, sending children to U.S. universities, or other scenarios, it is important to apprise them of gift and estate tax rules. Clients from countries with no estate or gift tax, such as China or Brazil, may not realize that giving a large sum of money to their children can have transfer tax consequences. Therefore, whenever possible, advisers should fully inform international clients of tax laws governing transfers and gifts.
For a detailed discussion of the issues in this area, see “Estate Planning for International Clients,” by Matthew S. Phillips, J.D., CPA, in the April 2012 issue of The Tax Adviser.
—Alistair M. Nevius, editor-in-chief
The Tax Adviser
Also look for articles on the following topics in the April 2012 issue of The Tax Adviser:
- A discussion of generation-skipping transfers to skip trusts.
- A look at community property rules and registered domestic partnerships.
- A discussion of the expansion of sales tax nexus.
The Tax Adviser is the AICPA’s monthly journal of tax planning, trends and techniques. AICPA members can subscribe to The Tax Adviser for a discounted price of $85 per year. Tax Section members can subscribe for a discounted price of $30 per year. Call 800-513-3037 or email firstname.lastname@example.org for a subscription to the magazine or to become a member of the Tax Section.
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