An Introduction to the US Estate and Gift Tax Regime

Transcription

1 An Introduction to the US Estate and Gift Tax Regime DAVID G. ROBERTS CTF Edmonton Young Practitioners Group September 2012 Issues Who is a US person? US transfer taxes Common estate planning issues 2

2 Who is a US person? US citizen Born in the US Naturalized in the US In some cases, born outside the US to US citizen parent Loss of US citizenship Any expatriating acts, such as renunciation? Certificate of loss of nationality, possibly retroactive Tax treaty does not affect tax status of a US citizen as US person, but does affect tax calculations Ethical issues 3 Who is a US person? US resident alien For US federal income tax purposes Permanent resident for immigration purposes (green card) Continues until abandoned or revoked Can be revoked if do not reside in the US Expiry of card does not terminate status Present in the US on sufficient days under substantial presence test (unless qualify for closer connection exception and have filed 8840) if following totals at least 183 Days (including part days) in current year plus 1/3 of days in preceding year plus 1/6 of days in second preceding year Tax treaty nonresident status affects US income tax payment obligations, but not tax reporting obligations or entity classification 4

3 Who is a US person? US resident alien For US federal estate and gift tax purposes Domicile For US state income tax purposes Varies among states California uses facts and circumstances to determine the jurisdiction with which taxpayer has closer connection Possible to be state tax resident without being federal income tax resident 5 Who is a US person? Domicile Definition in Treasury Regulations (b)(1) A person acquires a domicile in a place by living there, for even a brief period of time, with no definite present intention of later removing therefrom. Residence without the requisite intention to remain indefinitely will not suffice to constitute domicile, nor will intention to change domicile effect such a change unless accompanied by actual removal Permanent resident status for immigration purposes is a factor in determining domicile, but domicile is not presumed, unlike income tax test Determined after death in estate tax cases Typically, IRS argues that taxpayer was domiciled in the US US has tax treaties that address estate tax residency, but not with Canada, so Canada US treaty residency tiebreaker rules do not apply Cases 6

4 Who is a US Person? Loss of US person status State Department renunciation procedure Abandonment of permanent resident status Tax consequences For covered expatriate, deemed disposition under IRC section 877A and special tax under section 2801 Covered expatriate is US citizen who Has net worth over US$2 million or average US tax of more than $124,000 in previous 5 years, or Exceptions for some dual citizens Has not complied with all US tax obligations for previous 5 years 7 Who is a US Person? Tax consequences (continued) Covered expatriate test also applies to long-term residents (green card in 8 of last 15 years) who become treaty nonresidents or lose permanent resident status Pre-renunciation planning 2012 gift tax credit Gifts of non-us property by non-domiciled covered expatriate Ethical issues 8854 Pre-2008 rule required as notice and possibly annually for 10 years Special estate and gift tax rules during that period Watch 877(g) and deemed domicile No departure tax for aliens who are not long-term residents 8

5 US Transfer Taxes Estate tax Gift tax Generation skipping transfer tax Tax on transfers to grandchildren and more distant generations 9 US Transfer Taxes Estate tax rates and exemptions for US persons Exemption of US$3.5 million in 2009, maximum rate of 45% No estate tax in 2010, unless elect Exemption of US$5 million in 2011 and 2012, maximum rate of 35% Exemption of US$1 million in 2013 and following, maximum rate of 55% Gift tax rates and exemptions for US persons Exemption of US$1 million in 2009, maximum rate of 45% Gift tax in 2010 (as backstop to income tax, rather than estate tax) Exemption of US$5 million in 2011 and 2012, maximum rate of 35% Exemption of US$1 million in 2013 and following, maximum rate of 55% Exclusions in 2012 US$13,000 for gift to anyone, other than nonresident alien spouse US$139,000 for gift to nonresident alien spouse Note that exemptions are actually credits against tax 10

6 US Transfer Taxes Estate tax possibilities for 2013 Exemption of US$1 million, US$2 million, US$3.5 million, or US$5 million Graduated rates of up to 35%, 45%, or 55% Gift tax possibilities for 2013 Same as estate tax, but possibly with lower exemption Exclusions may increase slightly 11 US Transfer Taxes Transactions subject to tax Estate tax Death, not inheritance Tax imposed on estate of deceased Gift tax Transfer for inadequate consideration that is a completed gift 12

7 US Transfer Taxes Assets subject to tax Estate tax Worldwide assets owned (actual or constructive) of US person US situs assets owned (actual or constructive) of non-us person Gift tax Same except only tangible US situs assets for non-us person 13 US Transfer Taxes Situs Real estate located in the US Tangible personal property located in the US Shares of US corporations, but not shares of non-us corporations Debt of US persons Interest in partnerships Interest in trusts Tangible or intangible 14

8 US Transfer Taxes Treaty Pro rate share of credit Credit in lieu of marital deduction Marital deduction only if pass assets to US citizen spouse (directly or certain trusts) or to qualified domestic trust (QDOT) for non-us citizen spouse Credit for estate tax against income tax and vice versa 15 Common Estate Planning Issues Canada US tax differences that affect estate planning Treatment of gifts Basis step up on death, even if no estate tax (because non-us property of nonresident alien or estate tax credit), but no basis step up on gift No capital gains exemption Reserves and installment sales Classification of trusts as foreign or domestic Taxation of grantor trusts Taxation of non-grantor trusts Accumulation of income in non-us trusts Estate freezes Gift for gift tax purposes to extent of redemption amount of typical Canadian estate freeze preferred shares, unless mandatory redemption and cumulative dividend at market rate for such a company (not market rate for public company) 16

9 Common Estate Planning Issues Canada US tax differences that affect estate planning (continued) Income splitting Valuation discounts Constructive ownership for estate tax purposes CFC and PFIC issues PFIC issues for family investment companies, mutual funds, operating corporations with investments assets or income Corporate reorganizations Nonqualified preferred stock may be treated as boot on reorganizations IRC section 367 limits non-recognition rules Loss of CFC or PFIC status can cause recognition of income or gains Gifting programs Reporting of receipt of gifts from foreign person 17