Tax Tips and Traps Related to Foreign Gifts
“Tax Tips and Traps Related to Foreign Gifts,” that’s the subject of today’s ACTEC Trust and Estate Talk.
This is Stacy Singer, ACTEC Fellow from Chicago. Gifts from non-US persons can pass completely free of US gift tax if they are done right. To give us more information on this topic, you will be hearing today from ACTEC Fellow Ruth Mattson of Newton, Massachusetts. Welcome, Ruth.
Thank you, Stacy. This is a really exciting topic because gifts that US persons receive from non-US persons are kind of the holy grail of gift tax. They can come in unlimited amounts completely free of US gift tax, completely free of US generation skipping tax, and you can put it into a dynasty trust so that that gift will continue on for generations free of gift tax, free of estate tax, free of generation skipping tax. Now, of course, with great tax planning opportunity comes great risk for us as practitioners. So it’s important to set these up — these gifts — so that they are going to be honored by the IRS, and so that we don’t create new tax issues in this jurisdiction or in the jurisdiction where the grantor lives.
How do we confirm that there is no US gift tax? Well, first, we have to confirm that the transferor is a non-resident, non-citizen of the United States. The rule for this for gift tax purposes is different from the income tax rule. For income tax purposes, if you have got somebody who lives in the United States for a certain number of days of the year, they exceed the substantial presence test and they are US residents for income tax purposes. But for gift tax purposes, residence is based on domicile, and so in order to be a US resident, you have to be physically present here but also you have to have an intention to remain here indefinitely; and that’s what causes residence for gift tax purposes. It’s interesting, because you could have somebody who lives here in the US, who exceeds the substantial presence test, so they are filing income tax returns as a US resident, but they never intended to give up their original domicile; and so for gift and estate tax purposes, they might actually be a non-resident. Of course, if you are planning to make a large gift from that person, you will want to be very thoughtful about exactly which facts prove that they have not changed their domicile to the United States, but it’s a possibility and it’s something to remember.
The other thing to think about is if you have somebody who is currently a non-resident of the United States, and that means that they are domiciled outside of the United States, you have to check to be sure that they have not previously been a US citizen or a US permanent resident for longer than eight years, because if they expatriated, they could be a covered expatriate and any gift to a US person from a covered expatriate is going to be fully subject to US gift tax. So, you have to ask not only are they currently a US domiciliary, but have they ever been? And then, do that analysis.
So, let’s say that we have already confirmed that the transferor is a non-resident, non-citizen, and let’s say that our beneficiary is somebody who is a graduate student in the United States. And grandma would like to buy a house for them here in the United States. How do we arrange that gift in a way that is not subject to US gift tax? Well, any gift from grandma will be excluded from US gift tax as long as it is intangible or if it’s tangible property — and that would include physical items as well as real estate — if it’s tangible property, it will be free of US gift tax if it’s in a non-US situs. So, grandma can give the grandson, for example, any sort of – a wire transfer of money would be considered intangible, a stock in a company would be considered intangible. All of that, we don’t have to think about the jurisdiction where that property is located as long as we have confirmed that it is intangible. But in this case, grandma wants to give her grandson a house and she wants to give him a house in the United States. So, we know that a house in the United States is tangible property and it is US situs because it’s physically located here. And so, under the US gift tax laws, if grandma buys the house and then transfers title, that will be a transfer that is subject to US gift tax.
So some people think, well, can we convert tangible property into intangible property? And that is something that may be – it may be possible, for example, to purchase the home and then, if there are business reasons to hold that home in a company, and then the home is, for example, part of some kind of portfolio of real estate that is managed, the home could be held in a corporation and eventually some shares of that corporation could be gifted to the grandson; and that sort of a transaction would be free of US gift tax because it’s a gift of intangible property. However, if grandma gives the grandson cash, and says to him ‘you have to use this cash to buy a house’ and grandson signs and says, ‘yes, I will use this cash to buy a house,’ and then he does use that cash to buy that house. Well, there is a case on point that says that that will be seen – the IRS will look through that and they will say that he never received the cash itself. What he received was the house, because he had promised to use that money to buy that house.
Now, when I say cash, that is a really big, hot topic issue here. We talk about cash and transferring cash but physical cash, like stacks of dollars, are tangible property. So we don’t want grandma to be coming over to the US and handing her grandson tens of thousands of dollars, because first of all, that’s probably creating customs issues when she comes into the country with all that physical cash; but second of all, that’s a transfer of tangible property in the US. If grandma instead wires money, the wire transfer is an intangible transfer of property and there are cases that say that wire transfers are intangible and so she can be much more comfortable saying, ‘here’s your wire transfer of cash; I don’t know what you are going to use this for,’ and that transfer should not be taxable for US gift tax purposes.
Now, I just want to mention that in addition to gift tax, we do need to think about income tax issues associated with foreign trusts, foreign mutual funds, foreign corporations. There are information reporting requirements, Form 3520, the FBAR (Foreign Bank and Financial Accounts), FATCA (Foreign Account Tax Compliance Act) issues and there are also issues in the foreign jurisdiction. Some countries, you cannot send money overseas because they have currency control limits or they might have limits on certain physical items of property that need to stay in the country like national heirlooms, that sort of thing. So, beware of all those issues when making gifts, and the good news is that you can get a lot of money to a beneficiary completely free of US gift tax.
Thank you, Ruth for educating us on foreign gifts.
Other podcasts regarding foreign issues:
This podcast was produced by The American College of Trust and Estate Counsel, ACTEC. Listeners, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal or tax advice from their own counsel. The material in this podcast is for information purposes only and is not intended to and should not be treated as legal advice or tax advice. The views expressed are those of speakers as of the date noted and not necessarily those of ACTEC or any speaker’s employer or firm. The information, opinions, and recommendations presented in this Podcast are for general information only and any reliance on the information provided in this Podcast is done at your own risk. The entire contents and design of this Podcast, are the property of ACTEC, or used by ACTEC with permission, and are protected under U.S. and international copyright and trademark laws. Except as otherwise provided herein, users of this Podcast may save and use information contained in the Podcast only for personal or other non-commercial, educational purposes. No other use, including, without limitation, reproduction, retransmission or editing, of this Podcast may be made without the prior written permission of The American College of Trust and Estate Counsel.
If you have ideas for a future ACTEC Trust & Estate Talk topic, please contact us at ACTECpodcast@ACTEC.org.
© 2018 – 2023 The American College of Trust and Estate Counsel. All rights reserved.
Latest ACTEC Trust and Estate Talk Podcasts
Estate planning attorneys discuss differences in legal traditions and post-mortem rules with creditors, probate, and trust administrations in different states.
Considerations in the Possible Liquidation of a Closely Held Entity and Other Alternatives (Pt. 4 of 4)
The final part of the Closely Held Entities series explores potential liquidation, including audit, valuation and tax issues, and where it may make sense not to liquidate.
In part 3 of Closely Held Entities, estate planners examine critical issues as well as discuss conducting a lifetime stress test for those entities.