TRANSFER TAX PLANNING No. 2: Are you a US citizen,
Resident Alien, or Nonresident Alien? - In the Case of Non US Citizen

Genta Hataoka
Attorney and Counselor at Law
Investment Analyst
Law Office of Walter Wm. Hofheinz
© 2000 Genta Hataoka

I. Introduction

At the time of making investments in U.S., such as purchasing houses, commercial buildings, other real estates, business entities, stocks & bonds, etc., many clients do not give adequate consideration to U.S. transfer tax at all. At the time of disposing your investments, unfortunately there may be tax consequences which may be very expensive if applicable. Additionally, the tax treatment will be different depending on transfers made by U.S. Citizens, Resident Aliens, or Nonresident Aliens. This article discusses the tax treatment applicable to transfers by Non U.S. citizens, including Resident Alien and Nonresident Alien.

II. Transfers by US Citizen - Overview of Transfer Tax System Generally ...

A. Estate and Gift Taxes - Basic Concepts
The federal estate and gift tax system imposes an excise tax on gratuitous transfers, whether made during life or at death.
In U.S., if the property to be transferred exceeds $675,000, currently, in value at the time of transfer, whether during life or at death, it is subject to transfer tax. Estate and Gift Taxes could consume as much as 55 %, plus if the Generation Skipping Transfer Tax applies an additional tax.
B. Primary exceptions to the taxation of property properly includable in the gross estate are:

The annual gift tax exclusion: available for transfers of up to $10,000 per donor per donee per year; and
Three most significant deduction: the marital deduction, the charitable deduction, and the deduction for administration expenses and debts of a decedent.
There are special rules which govern the marital deduction when the transfers is to a non-U.S. citizen spouse: If recipient spouse is not a U.S. citizen (i.e., Resident Alien or Nonresident Alien), special rules apply, which imposes significant limitations which make tax planning essential.
Each individual is allowed an exemption from the generation skipping transfer tax of $1,010,000 currently. Thus a married couple can shelter up to $2,020,000 from estate taxation for a number of generations to come.

*For more information, please refer to TRANSFER TAX PLANNING No. 1: The Case of US citizen (see. XXXXX)

III. Transfers by Resident Alien

A.. For someone who has green card.
For example, spouses have a green card while maintaining the citizenship of their own country, such as Japanese or any other nationality.
The tax treatment is as same as US citizens with few exceptions.
B. Special Rule on Marital Deduction: Transfers To NonUS citizen spouse.
If recipient spouse is not U.S. citizen (i.e., Resident Alien or Nonresident Alien),

1. For lifetime transfer, the rules prohibit a donor from taking a marital deduction for gifts made during lifetime to an non-U.S citizen spouse but allows gifts to such spouse not exceeding $100,000 a year.
2. For transfers at death, the rules limit the methods by which a decedent may leave property to non-US citizen spouse at death. Testamentary transfers do not pass free of estate tax (i.e. within the marital deductions) unless :

The testamentary transfer is made to a qualified domestic trust (QDOT); or
The recipient spouse transfers the property to a QDOT within a short period after the decedent spouse's death; or
The recipient spouse makes special arrangements with regard to non-assignable property rights such as pension benefits or IRAs.

QDOTs require that there be at least one U.S. bank trustee or one U.S. resident individual trustee and that it contain certain other provisions insuring that the fund will always be within the reach of the IRS. The assets of the trust would be taxed at the surviving spouse's death, but unlike the normal marital deduction trust, the assets would be taxed as if added to the original decedent's taxable estate rather than being taxed as part of the surviving spouse's estate.

IV. Transfers by Nonresident Alien

A. U.S. situs property
Nonresident is subject to Gift and Estate Tax only on situated at the time of transfer in the U.S. But, be careful. If donor made revocable gift, then became resident alien, the gift will be included in gross estate for U.S. tax purposes because the gift is revocable at the time of donor's death. The donor may want to complete the transfer before becoming a resident or citizen.
B. Transfers of intangible property
The gift tax excludes all transfers of intangible property by nonresident aliens, but the estate Tax does not. The Code exempts the following specific types of tangible and intangible property such as: life insurance policies issued by U.S. insurance companies on the decedent's life, bank accounts in U.S. banks, and many forms of bonds, notes and debentures issued by U.S. governmental units and U.S. corporations.
Thus, generally, a nonresident alien may give away his stocks & bonds gift tax free.
If a nonresident dies owning shares of stock or note of U.S. company, however, the shares are subject to U.S. estate taxation and will not pass to beneficiaries tax free. (Unless the decedent resides in a country with which the U.S. has an estate tax treaty and the treaty exempts U.S. stocks or notes.)
C. Martial deduction
The estate of nonresident alien decedent may claim a marital deduction for U.S.-situs property left to a U.S. citizen spouse and also property left to an alien spouse if it passes to a QDOT or, if non-transferable, in a manner equivalent to passage to a QDOT. See above, the Special Rule on Marital Deduction: Transfers To Non-U.S. citizen spouse.
D. Charitable deduction
The estate of nonresident aliens may claim a deduction for U.S. situs property left to a U.S. charity.
E. Generation-skipping transfer tax
Generation-skipping tax applies if the transfer is subject to either to the gift or estate tax, that is, if the property was U.S. situs property at the time of gift or death and, in the case of gift, only if it was tangible property. In the case of a taxable termination or a taxable distribution, a nonresident aliens who had been previously been U.S. citizens, i.e. expatriates, may be subject to somewhat different rules.
F. Tax treaties
The U.S. has estate, gift and generation-skipping transfer tax treaties with several countries. Between U.S. and Japan, the treaty deals with estates of decedents having a beneficiary domiciled in Japan.

V. Conclusion