What Noncitizens Should Know About Transfer Taxes

Situation: According to a recent Forbes study a record 144 immigrant billionaires account for nearly 15% of all American billionaires and a quart of the country’s billionaire wealth.i Of these billionaires, 46 living in the U.S. hold non-citizen status. While we may not have billionaire clients, many financial advisors work with high net-worth individuals who are not U.S. citizens but either reside in the United States or own property here. These clients often face unique planning challenges involving estate and gift tax considerations that differ significantly from those affecting U.S. citizens.

Understanding these complexities is critical to helping clients protect their assets, achieve their legacy goals, and avoid unintended tax consequences. Advisors who are aware of these issues can provide greater value by identifying planning opportunities and collaborating effectively with tax and legal professionals to develop appropriate strategies. 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. 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.

On the other hand, if a person is not a U.S. citizen or a U.S. resident, then the only exposure to U.S. transfer taxes is over property that has “situs” within the U.S. In general, U.S. situs includes property that is physically

located in the United States and certain property deemed by the Internal Revenue Code to have U.S. situs regardless of its location. Noncitizen nonresidents (nonresident aliens) will be subject to U.S. transfer taxes only on property that is deemed to have a U.S. situs. Furthermore, nonresident aliens are subject to different U.S. transfer tax rules from those applicable to U.S. citizens and resident noncitizens.

Since the transfer tax system that applies depends on whether the noncitizen is a resident or nonresident (technically whether the person considers his/her “domicile” to be the U.S.) the first step in any transfer tax planning scenario is to determine whether there is a U.S. domicile for transfer tax purposes. For transfer tax purposes, “domicile” is defined as physical presence in the United States coupled with the intention of remaining in the U.S. permanently.

It should be noted that the transfer tax test for residency is not the same test applied for U.S. income tax purposes. Whether a noncitizen will be classified as a resident for transfer tax purposes is subject to a “facts and circumstances” test.