Whilst resident and non-resident aliens may reside in the US indefinitely, upon their death, their estates may face unforeseen deductions as a result of estate tax and gift tax. It is because of this that careful and timely planning is always recommended to prevent any surprises.
Understanding your residency status
As with income tax, your residency status can impact how much tax you pay on your estate. Since 2019, US citizens and domiciliaries have been subject to a minimum tax rate of 40% with an exemption amount of $10 million, indexed for inflation. In 2019 the exemption amount is set at $11.4 million. US non-doms are subject to US estate and gift taxation at the same rate (40%) but with an exemption of $60,000 only available for transfers at death.
If you hold a Green Card, US income tax is applied to your worldwide income for the entire time you hold the Green Card, irrespective of where you reside. As a US domiciliary, you will also find that US estate and gift tax is applied on worldwide assets.
Some Green Card holders choose to surrender their status which causes them to be considered a non resident alien for US income tax purposes. It’s important to note however that this status is assigned based on the assumption that you do not spend a substantial amount of time in the US; max. 31 days during the current year and 138 days during a 3 year period. Surrendering your Green Car may result in additional “exit taxes” for expatriation.
Estate and gift tax as a US domiciliary
An individual is considered to be US domiciliary for estate and tax purposes if s/he lives in the US and has no present intention of leaving. To add to the complexities, qualification for domiciled status differs for US estate and tax purposes and income tax purposes. It is therefore possible to be a resident for income tax purposes and not domiciled for estate and gift tax purposes.
The following factors are taken into consideration when determining whether you are a US domiciliary:
- Visa applications, tax returns etc.
- Length of US residence
- Green card status
- Country of citizenship
- Places where club, voting registration and driver licenses are maintained
If you are unsure about any of the above, consult with an international estate planning professional such as ourselves. We will help you to determine your potential US estate tax exposure to ensure you have appropriate plans in place.
What are estate and gift taxes?
Estate tax – a tax on your right to transfer property at your death. This takes into account everything you won or have certain interests in at the date of death.
Gift tax – a tax on money or property gifted to someone during your life.
International estate/gift tax treaties
As of January 2019, the US entered into estate and/or gift tax treaties with 16 countries. These treaties look to eliminate double taxation and provide additional deductions and tax relief. There are as follows:
- Australia
- Austria
- Canada
- Denmark
- Finland
- France
- Germany
- Greece
- Ireland
- Italy
- Japan
- Netherlands
- Norway
- South Africa
- Switzerland
- United Kingdom
2019 federal estate and gift tax rates
|
Min. taxable amount |
Max. taxable amount |
Tax rate in excess over min. taxable amount |
|
– |
$10,000 |
18% |
|
$10,000 |
$20,000 |
20% |
|
$20,000 |
$40,000 |
22% |
|
$40,000 |
$60,000 |
24% |
|
$60,000 |
$80,000 |
26% |
|
$80,000 |
$100,000 |
28% |
|
$100,000 |
$150,000 |
30% |
|
$150,000 |
$250,000 |
32% |
|
$250,000 |
$500,000 |
34% |
|
$500,000 |
$750,000 |
37% |
|
$750,000 |
$1,000,000 |
39% |
|
$1,000,000 |
– |
40% |
Plan for the future
To ensure that you maximise the funds you can transfer to your beneficiaries it is important to start thinking about next steps and planning for potential estate taxation. Employing an estate planning professional will ensure that eliminate any unforeseen taxes and reduced major implications as a result. Talk to one of our team today and start planning for the future.
