US Transfer Taxes

1. A non US citizen individual's liability to US federal gift, estate and generation skipping transfer (‘GST’) taxes is determined by:
1.1 Domicile; and
1.2 The situs of assets

2. US citizens and foreign nationals domiciled in the US (‘Foreign Domiciliaries’) are subject to US transfer taxes on their global estates with an indexed lifetime exemption of $11.18 million, a 40% flat rate applying to the excess estate. The gift and estate taxes are unified, so that lifetime taxable gifts use up the estate tax exemption. The US has borrowed the British concept of exemption portability between spouses, so that the deceased spouse’s unused exemption amount (“DSUEA’) can generally be used by a surviving US citizen or domiciled spouse to increase her total exemption amounts.

3. A Foreign Domiciliary is generally subject to US gift tax only on real estate and other tangible assets located in the United States (including cash in a US bank account). For estate tax purposes, the taxable estate also includes intangible assets located in the United States, such as US incorporated stocks and mutual funds, though generally not bonds or other debt nor cash held in US non business bank accounts. A Foreign Domiciliary is subject to GST tax only with respect to a transfer which is also subject to US gift or estate tax. The GST tax is imposed on transfers which skip a generation, e.g. a Foreign Domiciliary’s gift of US real estate to a grandchild.

4. Foreign Domiciliaries have a US estate tax exemption of only $60,000 (absent treaty relief) and are subject to estate tax rates of 26% to 40% on the first $1 million of taxable estate. However both the DSUEA amount and a proportionate amount of the basic exemption amount can be claimed by treaty residents of ten countries which have OECD type estate tax treaties or provisions with the US.

5. There is no Foreign Domiciliary exemption for gift tax - only an annual per donee exclusion of $15,000 indexed which is increased for a gift to a non US citizen spouse ($152,000 in 2018).

6. A Foreign Domiciliary has an indexed lifetime GST exemption of $11.18 million, although this tax will usually apply only to US sited taxable property.

7. US estate tax can be deferred by leaving property to a surviving spouse in a qualified marital trust such as a ‘QTIP’ trust (income to surviving spouse for life then as directed by the dispositive instrument). However if the surviving spouse is not a US citizen the trust must also be a qualified domestic trust (‘QDOT’) which ensures collection of US estate tax on the inherited amount including lifetime distributions of capital.

8. As of March 2018, 21 US States and the district of Columbia, had some form of estate or inheritance tax, including a number of decoupled ‘pick up taxes’ (which equal the now repealed federal estate tax credit for state inheritance taxes). These states are all generally Democratic with the exception of Tennessee, Kentucky, Iowa and Nebraska. State tax exemptions are usually less than the federal exclusion and range from $675,000 to the federal exemption with several in the $1 million to $2 million range.

9. As of March 18, 2018, Connecticut and Minnesota were the only two states which had a state gift tax. McGuire Woods has a website listing the current estate transfer taxes by state, which is updated periodically.

10. The decoupling of state inheritance and estate taxes from the federal tax rules, plus the higher federal tax exemptions of $11.18 million as opposed to much lower state tax exemptions have created major estate planning issues in formulating a strategies to avoid or defer state tax consistently with federal tax. These strategies include making a separate state QTIP election for state tax, where allowed by state law, using exemption portability to recapture the excess of federal over state exclusions and/or moving to a different state.

US Citizens and Domiciliaries 2018

Gift and Estate Tax lifetime exemption - $11,180,000 (portable by surviving spouse)

GST Tax lifetime exemption - $11,180,000

Maximum rate - 40% (begins at $1,000,000 but no tax until gifts/estate exceeds $11,180,000)

Annual Exclusion - $15,000 per year per donee ($152,000 for gifts to non US citizen spouse); unlimited gifts to US citizen spouse

Non Domiciled Aliens 2018

Gift Tax - annual per donee exclusion, but no lifetime exemption; US sited tangible gifts taxable in excess of $15,000 per year per donee ($152,000 to non US citizen spouse)

Estate Tax - $60,000 exemption (or, if treaty applies, pro rata the US resident exemption x US/worldwide assets) - applies to US sited assets except debt

GST Tax (if gift or estate tax applies) - $11,180,000 lifetime exemption plus annual exemption
All Liability Disclaimed

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