• Monte Silver, Tax lawyer

U.S. Estate and Gift taxation for non-U.S. Persons

U.S. Estate and Gift taxation for non-U.S. Persons

The U.S. estate tax and U.S. gift tax are similar but not identical taxes. The estate tax is a tax on what a person owns at death (the estate). The tax is paid by the estate after death. The gift tax is imposed on all gifts of property made during a person’s life. In principle, the gift tax applies to transfers of property that would otherwise have been part of the estate and subject to estate tax at death.

The estate tax and gift tax are conceptually one unified tax. There is one exemption amount ($5.4M for U.S. Persons and $60,000 for non-resident aliens). At the moment when (i) the sum of the lifetime taxable gifts, or (ii) the amount of the lifetime taxable gifts + the taxable estate, exceed the exemption amount, tax is due.

Given the policy of preventing a person from gifting away assets before death to avoid estate tax, one would think that the definition of what is subject to gift tax and estate tax would be identical, to avoid manipulative tax planning. If this indeed the case? No! And here the fun begins for us tax-geeks.

What are the main types of property subject to estate tax?

- U.S. real property

- Tangible personal property located in the U.S. at the time of death

- Stocks and bonds issued by a U.S. entity.

What are the main types of property subject to gift tax?

- U.S. real estate

- Tangible personal property located in the U.S. at the time of the gift.

Given the differences in the definitions, it appears that it would be possible for a person to simply gift away their U.S. stocks and bonds before death. The gift itself would not be subject to U.S. gift tax. Furthermore, when the gifter passes away, these stocks and bonds would no longer be his/hers, thus avoiding U.S. estate tax as well.

Why this apparent loophole, which makes no sense from a policy point of view? Well, as they say, the legislative process and the making of hotdogs are two things you don’t want to observe up close. The historical reasons for this policy inconsistency are not pretty.

But, to the benefit of us tax-geeks, the above solution of course is not that simple for two reasons:

  1. The lessor problem is that the persons receiving the gift of U.S. stocks and bonds remain subject to estate tax should they die owning these assets. And if the value of the stocks and bonds are substantial, coupled with the fact that the recipient does not know he/she will die, this solution is not optimal. Much better solutions exist.

  2. The greater problem is any gift make in anticipation of death is ignored for purposes of estate tax, unless specific conditions are met. In other words, unless certain conditions are met, should a person gift the stocks and bonds away without careful planning, the gift will be ignored and estate tax will be imposed on the giftor’s estate.

What is “anticipation of death”? And what are conditions that must be met to avoid the claw-back of the gift into the estate of the giftor? Very good question.

Both the “anticipation of death” provision and the conditions to avoid the inclusion of the gifted assets in the taxable estate are not subjective tests where the giftor can simply say “I had no intent of making the gift because of death”. The tests and the conditions are objective tests that must be complied with in order for both the gift to be tax free and for the assets to avoid estate tax.

Nothing in this article should be considered as legal advice or the provision of legal advice.

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