Disclaimer: For Broker/Producer Training Use Only - Not for use with the General Public, You should not rely on this information to make any financial decisions or to enter any financial agreements. Please consult your financial/tax advisor before implementing any financial planning using the information provided.
Ben London CLU, ChFC, AEP©, Certified Financial Planner®, Director of Private Wealth Planning and Roberto Heinert an International Life Insurance Specialist, thank you!
Cross-border taxation can be difficult for non-tax professionals, let Capitas Financial make it easier for your next conversation with global clients!
Identify your client's residency status - its important for tax purposes!
Your client's Domicile can affect which assets are subject to U.S. transfer tax
Just like with income taxation, residency effects WHICH of a noncitizen’s assets could be subject to U.S. estate tax. U.S. residents need to take all of their worldwide assets into account, whereas, non-U.S. residents may only need to consider certain assets in the U.S.
Nonresidents are generally only subject to U.S. transfer tax on certain assets. A tax or legal advisor can best help determine whether client’s specific assets could be subject to U.S. tax.
See the chart below for examples of assets subjectivity to U.S. Tax
When did you review your international client's U.S. estate's taxation?
Calculation of Gross Estate
For U.S. federal estate tax purposes, a non-U.S. resident decedent’s gross estate value is determined in the same way as for a U.S. citizen or resident.
Anything a noncitizen owns at death will be included in his or her U.S. gross estate
- Remember, nonresident noncitizens should only have to consider certain U.S. situs assets as a part of this calculation
“Gratuitous transfers” mean gifts. There are many ways to use gifts in estate planning, but clients will want to be aware that removing an asset from his or her gross estate is not always just as easy as giving it away. If the client makes a gift but retains an interest in the property, it might still be includable in his or her U.S. gross estate.
Resident vs Non- Resident
U.S. residents, like U.S. citizens, can take advantage of the full U.S. estate tax exemption. In practice, the exemption is actually applied as a credit.In cases where both spouses are either U.S. citizens or residents, the surviving spouse can use whatever exemption (credit) is left over from the spouse who passed first.
The lifetime exemption available to U.S. citizens and residents is not available to nonresidents. The exemption amount available to nonresidents is $60,000 and is only available at death (not for gifting during lifetime) whereas residents have $11.4 million, in 2019, and is adjusted for inflation. This exemption for nonresidents is applied as a credit of $13,000 and is not adjusted for inflation. Because this exemption is so low, it represents a distinct planning need for many nonresident clients with U.S. property.
Always check to see if there is an estate tax treaty with any other applicable country. The handful of treaties that exist can significantly increase the exemption amount for nonresidents and might even allow for portability of remaining exemption between spouses.
Have you discussed whether the unlimited marital deduction available to non-U.S. citizens with your client?
Unlimited marital deduction
The unlimited marital deduction allows U.S. citizen spouses to transfer an unlimited amount of property to each other during life or at death without triggering U.S. transfer taxation. The decedent’s estate may claim the deduction at the death of the first spouse.
The availability of the estate and gift tax unlimited marital deduction depends on the citizenship status of the recipient spouse and not the citizenship or residency status of the decedent or donor spouse
In the case of testamentary transfers, if the surviving spouse is not a U.S. citizen at the time of the decedent spouse’s death, the estate tax unlimited marital deduction is generally disallowed, unless an applicable treaty allows otherwise, or the property passes to a qualified domestic trust (QDOT)
In situations where at least one spouse is a noncitizen, the unlimited marital deduction may not be available. The result? Unexpected gift taxation or, even a first-death U.S. estate tax for wealthy couples.
The key question is: who is the surviving spouse? If the surviving spouse is a U.S. citizen, the unlimited marital deduction is available. If the surviving spouse is a noncitizen, the unlimited marital deduction is likely not available.
Potential solutions may be life insurance can also be introduced as a way to plan for liquidity at first death.
Even though the unlimited marital deduction isn’t generally available when the surviving spouse is a noncitizen, an annual exclusion amount is available. In 2019, you can give $155,000 each year to a noncitizen spouse — usually without paying U.S. gift tax
Do your clients know about this? And, would it make sense to leverage this gift as a life insurance premium?
Solutions for your client? Have you considered the estate taxation of U.S. life insurance?
Estate taxation of U.S. life insurance
For nonresident aliens, a U.S. life insurance death benefit is not includable in the client’s taxable U.S. estate. An ILIT is not needed, but still may be desirable in some situations.
For resident aliens, the death benefit is includable in the client’s U.S. taxable estate.
Be careful: The cash values of a U.S. life insurance policy owned on the life of another person would be includable in the U.S. taxable estate of the owner whether or not the client is a U.S. citizen, resident alien or nonresident alien.
As we saw in the chart earlier, U.S. life insurance is a tax-advantaged asset — even for noncitizens. It’s also a flexible asset that allows clients to control how much of their wealth passes on and to whom.
Lets talk about better protecting your client's money, and more importantly - their family's financial security
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