Increasingly, marriages and families span international borders, rife with diverse mixes of citizenships and national origins. For many stateside professional advisors, working on a cross-border planning opportunity is no longer rare.
Estate and income tax planning may be less than straightforward under normal circumstances. Mixed-nationality families face added challenges—as well as opportunities. Here we’ll review several tax disparities between nonresident alien (NRA) and U.S. resident/citizen spouses, where planning would optimize a family’s global balance sheet.
U.S. citizens are subject to income, estate, and gift taxation. For non-U.S. citizens, it’s critical to understand how the concept of residency (income taxation) is different from domicile (estate and gift taxation) to determine taxability. There are two primary avenues for a non-U.S. citizen to become a U.S. income-tax resident: by becoming a legal permanent resident, or via the substantial presence test, a day-count test codified by the IRS. After meeting these requirements, U.S. income taxation applies to worldwide income and assets.
U.S. citizens, domiciles, and U.S. situs assets are subject to U.S. estate and gift taxation. A foreign national is seen as a U.S. domicile if he or she intends to make the United States his permanent home, and does not presently plan to leave. There are no set rules for determining domicile, but obtaining a Green Card is an objective fact that points towards domicile. Courts also review family ties, employment, location of property, and other subjective factors.
A British executive who moves from London to New York on a short-term assignment (let’s say, 18 months) is probably not domiciled in the United States. The expectation is that he or she would return to foggy Albion after the assignment. Should the executive extend his or her U.S. stay or acquire a Green Card, such factors would be in favor of attaining U.S. domicile. This would subject his or her worldwide assets to U.S. estate and gift taxation.
An NRA (defined above) is the tax classification given to individuals who aren’t U.S. citizens, U.S. tax residents, or U.S. domiciles. For income-tax purposes, NRAs are typically taxed only on U.S. source income. For estate and gift-tax purposes, NRAs may have estate tax exposure on their U.S. situs assets. U.S. situs assets tend to include real and tangible personal property located in the United States. Unless modified by a bilateral estate and gift tax, NRAs only have a $60,000 estate tax exemption on U.S. situs assets.
An NRA living in the United Kingdom and owning Apple stock (U.S. based company, U.S. situs asset) would not be subject to additional U.S. taxation due to specific provisions in the U.S./U.K. estate tax treaty. However, if this individual moved permanently to a country where there’s no estate tax treaty, the value of Apple would be taxed at 40% on any amount over $60,000.
Advisors should seek to understand a client’s intentions while managing multijurisdictional legal requirements. One thing is for sure: Families must plan for ever-changing laws, and it’s important to keep strategies flexible. People will move to different jurisdictions, laws will change and planning strategies should evolve. It’s important for mixed-nationality couples to develop a plan that is both tax-efficient and -compliant, while also jibing with the aims and circumstances of their relationship. This will go a long way toward protecting and building the family’s international wealth for generations current and future.
For more information, please read:
International Tax Planning 101 | Wealth Management