When it comes to estate and gift taxation, non-U.S. citizens face unique challenges based on their residence and domicile status. Understanding these concepts is crucial for effective estate planning and tax management.
Determining Domicile for Estate and Gift Tax Purposes
Estate and gift taxation of non-U.S. citizens is based on residence. For estate and gift tax purposes, an individual is a resident of the U.S. if they are domiciled in the United States. Domicile is determined using a facts and circumstances test, which considers various factors, including:
- Statements of intent (in visa applications, tax returns, wills, etc.)
- Length of U.S. residence
- Whether the person has a green card
- Style of living in the U.S. and abroad
- Ties to the former country
- Country of citizenship
- Location of business interests
- Place where club and church affiliations, voting registration, and driver licenses are maintained
A person who does not meet these criteria is a non-U.S. resident (non-resident alien) for estate and gift tax purposes.
Differences Between Estate and Gift Tax Residency and Income Tax Residency
It’s important to note that residency for estate and gift tax purposes is determined differently than residency for income tax purposes. This means that an individual may be a resident alien for income tax purposes but a non-resident alien for estate and gift tax purposes.
Potential for Double Taxation
Countries apply different standards to determine domicile, which can result in a person being considered domiciled in more than one country. This situation can lead to double taxation on estate assets. Proper planning, including the consideration of governmental tax, treaties, and foreign tax credits may help eliminate or minimize the risk of double taxation.
Estate Tax Issues for Non-Citizens
- Non-Citizen U.S. Residents: Taxed on the value of their worldwide assets owned at death, similar to U.S. citizens.
- Non-Citizen, Non-U.S. Residents: Taxed only on the value of their U.S. “situs” assets, which generally include real and tangible personal property located in the U.S. and stock of U.S. corporations. Bank accounts held by U.S. banks are not considered U.S. situs assets for this purpose.
Applicable Exemption Amounts
- U.S. Residents: Eligible for estate and gift tax exemptions, which are $13,990,000 in 2025.
- Non-U.S. Residents: Generally allowed a reduced estate tax exemption amount, permitting only $60,000 of U.S. situs assets to be transferred free of U.S. estate tax in 2025.
Marital Deduction Considerations
- U.S. Citizen Spouse: An unlimited marital deduction allows for the deferment of any estate tax owed until the death of the surviving spouse. An unlimited amount of assets can pass to a U.S. citizen spouse without being subject to U.S. estate tax.
- Non-U.S. Citizen Spouse: A marital deduction is generally not allowed unless U.S. property is held in a Qualified Domestic Trust (QDOT) for the benefit of the non-U.S. citizen spouse. The QDOT must comply with specific requirements, and an election to claim the deduction must be made by the executor of the decedent’s estate on the U.S. estate tax return.
Estate and Gift Tax Treaties
Some governmental estate and gift tax treaties allow for a form of marital deduction in cases where such a deduction would not normally be available. The U.S. currently has estate and gift tax treaties with the following fifteen countries: Australia, Austria, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, South Africa, Switzerland, and the United Kingdom.
Conclusion
Understanding the nuances of residence and domicile for non-citizens is essential for effective estate planning and tax management. Proper planning and consideration of tax treaties and foreign tax credits can help mitigate the risk of double taxation and ensure that your estate planning goals are met.