US Estate Tax, Gift Tax and Other Transfer Tax Planning

The US imposes transfer taxes on the value of gifts made by and the value of estates left by, US citizens, transfer tax residents and transfer tax nonresidents (in the case of transfer tax nonresidents, the taxes are imposed only with respect to property considered to have a US “situs”).

Residence is determined differently for purposes of US transfer taxes than it is for income tax purposes. For transfer tax purposes, residence denotes a more permanent or indefinite connection with the US (similar to common law “domicile”) than does income tax residence. Thus, a non-US citizen may be an income tax resident, but possibly not a transfer tax resident if she is domiciled outside the US. Likewise, a transfer tax resident who has moved abroad temporarily may retain his US transfer tax residence, but become an income tax nonresident.

The present tax maximum tax rate applying to the value of gifts and estates in excess of the applicable exemption amount is 40%, but that rate may soon be raised. The statutory exemption amount for gifts made by transfer tax nonresidents is a mere US$15,000, while that applying to their estates is a mere US$60,000. In contrast, the exemption amount applying to gifts and estates of US citizens and transfer tax residents is US$11.7 million as of April 2021 (although legislation may lower this amount to US$3.5 million or below for estates and US1.0 million for gifts).

A further 40% “generation-skipping transfer” tax (“GSTT”) may also apply to the value of certain transfers that are considered to “skip” one or more generations (and, thus, avoid transfer taxes at the skipped generation’s level). Fortunately, the larger multi-million dollar exemption amount mentioned above also applies for GSST purposes to both transfer tax residents and nonresidents (at least for the time being).

For the residents of some countries that have an applicable tax treaty with the US, the estate (and in some cases, gift) taxes applying by US statute may be reduced or eliminated on certain transfers. Under the Canadian income tax treaty, for example, the estate of a Canadian resident may claim a pro-rated portion of the larger exemption amount applying to US citizens, based on the ratio of the value of US situs assets to worldwide assets. An additional pro-rated credit in the same amount may also apply for transfers between spouses. In order to claim these credits, a US estate tax return must be filed disclosing the value of the Canadian resident’s worldwide assets. In contrast, no tax relief is provided by that treaty for gifts of US situs property made by Canadian residents.

Finally, former US citizens and green card holders who were “covered expatriates” may be subjected to a special inheritance tax regime. Under that regime, the value of transfers by such persons to US beneficiaries of property located outside the US (which would no longer be subject to US gift or estate tax), may be subject to US inheritance tax at a 40% tax rate (see our webpages entitled “Expatriation Tax Planning for US Citizens” and “Departure Tax Planning for Relinquishment of Green Cards”).

We have decades of experience assisting clients to avoid or minimize US transfer taxes in structuring their US investments and in planning for asset transfers as part of our cross-border estate planning practice. We also advise our nonresident clients concerning their possible qualification for tax treaty benefits in computing their taxable estates as part of that planning. We welcome any inquiries that you may have concerning your specific tax situation. Feel free to call us at (760) 578-5093, contact us via email at Brent@LanceCrossborder.com or by using our online contact form. We will respond to all relevant inquiries quickly, without any obligation.