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Need For A Check-Up; Taxation, Property And Citizenship.

By John Dietz - Email Editor

Date : 26-Feb-2008

The devaluation of the US dollar has no doubt facilitated some of the real estate boom in many coastal US markets. The cheap US currency enabled Europeans and many others to make the claim that “America was and is on sale”. Floridians certainly have their fair share of the European market.

Before the subprime issues arose, real estate believed in “let the good times roll,” and of course now, as the old saying goes, the candle that burns twice as fast, burns half as long. The real estate market has caused many from abroad to rethink their US holdings. When times are good its buy, buy, buy, and in many instances that means no concern for structure or tax ramifications.

For example – Here is a summary from STEP – USA, an article prepared by Michael W. Galligan, attorney and partner at Phillips Nizer LLP, New York office, at the 2007 Third Annual International Estate Planning Symposium sponsored by the New York Bar Association and the Society of Trusts and Estate Practitioners.

Many jurisdictions in the world have no inheritance tax or death-related income tax. There is always significant unhappiness with the US death and inheritance taxes with U.S. citizens. Most people use the justification that they have already paid money on the taxes and why should they have to pay it twice. However, at the time, we have no choice but to put together estate planning in the most efficient manner for reducing these taxes, protecting our assets and preserving what we have accumulated. U.S. citizens are used to it, but in some countries, these taxes are unheard of. When it comes to these types of taxes on non-U.S. citizens, there is a different standard for their assets and wealth accumulation.

The choice of property, assets, inheritance and personal issues should be the subject of a comprehensive estate plan detailed by a qualified attorney and CPA who specializes in taxation of non-U.S. citizens.

Australia, Argentina, Brazil, China, Israel, Mexico, New Zealand, Russia, Sweden and Italy for the most part have no gift taxes. Gifts of some types of U.S. property are subject to U.S. estate tax even though the owner was never a U.S. citizen and never was domiciled in the U.S. Thus if a person from one of those countries eventually becomes subject to U.S. transfer taxes, there is no credit to the owner’s estate for the U.S. death-related tax in their own countries; to them the U.S. tax payment is a complete loss. Often this wipes out the estate or devastates most of it to the unsuspecting knowledge of the estate owner and the heir.

There is a remedy for non-U.S. persons. If a non-U.S. person does not want to consult a qualified tax person and attorney, then they should keep their U.S. wealth to a select choice of investments. The choice of investment is more important to the strategy then the amount of the investment. For instance, bank deposits with U.S. branches are not subject to U.S. estate tax (although there is an ongoing dispute over this). It is undisputed that most bonds and notes issued after July 18, 1984, that are held by non-U.S. persons and eligible for the income tax exemption and under IRC Section 871(h), will be subject neither to U.S. estate nor U.S. gift tax as long as the owner does not become a U.S. resident for U.S. income tax purposes.

The one thing that is known is that real property directly owned by a non-U.S. person will be considered U.S. situs property and will be subject to gift, estate and GST tax. The same is true for all tangible property such as art (except for museum exhibitions for educational purposes), antiques, manuscripts or other intellectual property, jewelry and boats. There is also language in IRC Section 2104(a) that implies that shares of stock “owned and held by a nonresident or a noncitizen of the United States” will be subject to U.S. gift tax. The question of other types of interests such as small companies and partnership interests are also at risk and open to much interpretation by the courts and the IRS.

It is much harder to effectively resolve a situation then to create it properly in the beginning. The situation becomes considerably more complicated when an estate involves real property and other associated tangible wealth. All dispositions of U.S. real property interests are subject to U.S. capital gains tax, therefore making transfers to direct fee interests in U.S. real property to non-U.S. corporations and partnerships are generally subject to U.S. capital gains tax. There are exceptions and this is why non-U.S. citizens should employ experts to protect their wealth and extend their qualified opinions on these issues.

Please feel free to contact our office for a review of your planning.

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