If you’re not a U.S. citizen but are planning to relocate to the United States on a permanent basis, you need to consider your estate planning situation now. You need to understand how your assets and plans may be affected by the U.S. estate and gift tax system.
The laws surrounding U.S. and international estate planning are complicated. Only by carefully planning in advance can you hope to reduce your tax liability and protect your family’s wealth for future generations.
U.S. Estate Tax Laws Apply
Your country of origin (or the place where your estate plan was created) doesn’t dictate how your estate will be treated under the law. If you’re in the U.S., paying U.S. taxes, you need to understand U.S. laws. The assets of your estate may incur capital gains tax liability. When you pass, your estate may also incur an estate tax liability.
You need to understand the impact of your taxpayer status. Residents, non-resident aliens and citizens of the United States may face differing tax treatment on transactions involving income and assets included in an estate plan.
A nonresident alien is anyone who can’t claim status as a resident alien or a U.S. citizen for the purposes of paying taxes.
A resident alien is anyone who can pass the green card test or the substantial presence test for that calendar year. U.S. citizens are those born in the United States or who have completed the naturalization process to become citizens.
Before moving to the United States, you need to know your tax status. If you’re a citizen or a resident, your international income will be taxed. Non-resident aliens pay taxes only on the income they earn in the United States.
Planning ahead allows you to maximize the benefits of your taxpayer status. It can reduce both your income and estate tax liability and also put you in the best position to pass assets on to your chosen beneficiaries at the lowest estate tax cost.
The Impact of Domicile on Estate Tax Liability
Income tax is only one part of the overall tax system in the U.S. Estate taxes can severely impact your ability to create a legacy. An experienced estate planning attorney can help you create a plan to accomplish your goals.
U.S. estate and gift taxes vary depending on something called domicile. If you’re domiciled in the U.S., you are subject to estate and gift taxes at a minimum rate of 40% for assets transferred above the tax-free exemption amount. In 2024, the tax-free exemption amount is over $13 million per person for U.S. citizens and domiciliaries.
Determining whether you’re actually domiciled here is complicated. Your domicile is your place of legal residence. There is a subjective test that examines multiple factors, including the location of your primary home, your place of employment, the location of your family and assets, and more.
If your estate is substantial, it may be wise to transfer part of the estate prior to coming to the United States. This can allow you to limit your exposure to U.S. estate taxes.
Strategic Planning Options Prior to Coming to the United States
A person from outside the United States who intends to pass on their holdings to someone in the U.S. should consider creating and funding irrevocable foreign trusts before coming here. If a trust is properly drafted and administered, gifting assets to the trust before you move to the U.S. can help to ensure they will not be subject to estate tax upon your death.
Creating such a trust must be done properly. You must take care that the trust is not funded improperly with U.S. assets to cause the property to be deemed to be included in your estate for U.S. estate tax purposes.
If desired, it is possible to maintain control over the assets placed in a trust by using a directed trust structure. With a directed trust, you keep your options open with regard to who has the power to control the assets for investment purposes or to make distributions.
Get the Help You Need to Plan Ahead
The right strategy, put into place prior to coming to the United States, can make a significant difference in how much you can pass on to your loved ones. It pays to plan ahead with the help of an experienced estate planning lawyer.
A clear understanding of your goals and legal options will lead to better decision-making. With a little forethought, you can control your residency status so that it aligns with your estate planning process. The Law Office of Janet Brewer in Los Altos can help. Call us today at 650-325-8276 or contact us online.
