Foreign Nationals in the U.S. - Estate Tax, Wills & Guardianship

By R. Scott Jones, Esq.

Foreign nationals arriving in the United States as investors or on business generally have a lot on their mind, but all too often - although quite understandably - U.S. estate planning and its co-ordination with home-country arrangements do not make the list!

Crucial to understand in this increasingly global world is a fundamental and longstanding legal concept that governs a person's status, capacity and rights - lex domicilii, now known as the law of domicile.

This notion of domicile embodies the idea as to where one considers one's permanent home to be, and has a bearing on the application of law in multiple areas, including marriage, guardianship, inheritance, tort and contract law. While a domicile of origin is acquired at birth, a domicile of choice may be acquired at a later point in life.

In the United States, the concept of domicile operates at the State level and, for the purposes of this discussion, governs a number of important issues.

In general, an individual is considered domiciled in the U.S. (and, therefore, resident for estate and gift tax purposes) if he or she lives here, for even a brief period of time, with no definite present intention of leaving the United States.

The courts and the Internal Revenue Service (IRS) look to various factors to assist in establishing the intent of the individual in connection with a determination of domicile, Including the following:

  • Place of residence/business
  • Length of time at residence
  • Location and extent of social and community contacts
  • Declarations of intent
  • Existence of a green card or visa
  • Location of bank accounts
  • Location of physicians
  • Motives for changing residence
  • Renting versus owning a home

Estate Taxation

The United States subjects both its Citizens and "residents" to estate and gift tax on worldwide assets. Unlike the objective tests applied to U.S. federal income tax, however, the estate and gift tax definition of the term "resident" is not predicated upon days of presence in the country but, rather, is driven by this notion of domicile.

U.S. residents are subject to estate tax on the value of world- wide assets, subject to certain exemptions. If an individual is a non-resident, however, a different set of rules applies. The United States taxes non-residents only on U.S. "situs" property. U.S. situs property for estate tax purposes includes, but is not limited to, real estate located in the U.S., tangible personal property located in the U.S. and stock of a U.S. domestic corporation. The highest marginal rate of estate tax is 45% in 2009.

Exclusion Amount

In the case of residents, the limit on the amount that can be transferred tax-free at death in 2009 is $3,500,000 per individual.

However, this rule does not apply to non- residents for U.S. estate tax purposes. Instead, non-residents are entitled to a much smaller exclusion amount -- only $60,000 in assets is exempt!

Deductions for Mortgage Debt

For U.S. residents, certain deductions are available to reduce the value of the gross estate before estate tax rates are applied to the resultant taxable estate. One of these deductions is for unpaid mortgages or other indebtedness outstanding on the decedent's date of death. For non- residents, however, the deduction for general debts (e.g., fullrecourse mortgages) is limited to a pro-rata share of the outstanding liability based on the ratio of U.S.-situs assets to world-wide assets.

Even this pro-rata amount is only permitted if the non-resident's estate is willing to disclose the existence of and information about the decedent's worldwide assets. As many non-residents estates are unwilling to make such disclosure, the estate tax may be assessed without the benefit of this deduction at all.

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