Transfer Tax Basics for Noncitizens

Situation: As we get closer to the sunset of the high estate tax exemption on 12/31/2025 a larger percentage of the inquiries I receive involve how best to prepare for the reduction of the exemption. Some of the calls
have involved the application of U.S. estate tax laws to clients who are not citizens of the United States, but either reside or own property in the U.S. Individuals who reside in the U.S., but who are not citizens could face significant estate and gift tax problems. Advisors can help their clients avoid tax traps by knowing the rules and appropriate life insurance planning techniques. The purpose of this Counselor’s Corner is to provide you with a general understanding of the special estate and gift tax rules that apply to noncitizens. This article also contains life insurance planning techniques.

Solution: Before we begin, we need to clearly understand the basic rules and terminology. U.S. transfer taxes are triggered by one of two things – jurisdiction over the person, or jurisdiction over the property.

Jurisdiction over a person arises where the individual is a U.S. citizen or a noncitizen resident (resident aliens). The United States treats noncitizen residents similar to U.S. citizens for transfer tax purposes. This means the U.S. transfer taxes apply regardless of where the property is located.