U.S. Estate and Gift Taxation of Nonresident Aliens

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An Examination of the Rules and Regulations

The U.S. transfer tax regime requires special planning for nonresident aliens who invest within the United States. Estate and gift tax rules for individuals look first to whether the individual is a U.S. citizen. If the individual is not a U.S. citizen, then the next inquiry is whether the individual is a resident of the United States, with residence in the transfer tax context being synonymous with being a U.S. domiciliary. While U.S. citizens and residents are subject to worldwide estate and gift taxation on their gratuitous transfers, nonresidents - that is, persons who are neither U.S. citizens nor U.S. domiciliaries - are only subject to the U.S. transfer tax system on property that is situated, or deemed situated, in the United States. In addition, nonresident aliens are generally not subject to U.S. gift tax on the transfer of intangible property (such as U.S. securities), regardless of where the property is situated, or deemed situated. Furthermore, nonresidents are only subject to the federal generation-skipping transfer (GST) tax with respect to transfers to a person or persons that effectively "skip" a generation, where such transfers have been subject to the federal estate or gift tax.

CPAs advising such individuals should be aware of the basic rules governing the estate and gift taxation of nonresident aliens. The starting point for tins analysis is to determine whether a transferor who is not a U.S. citizen qualifies as a resident of the United States for estate and gift tax purposes.

Determining Residence

For an individual who is not a U.S. citizen, the determination of residence for federal estate and gift tax purposes is predicated upon domicile. For federal estate and gift tax purposes, "[a] person acquires domicile in a place by living there, for even a brief period of time, with no definite present intention of later removing therefrom" (Treasury Regulations section 20.0-1 [b]).

Although the intent of an individual is subjective, it is established by objective criteria, such as statements and conduct, and by external facts and circumstances. Because they are prone to being self-serving, statements concerning one's domicile are generally accorded only a relatively small amount of weight Therefore, courts generally will consider additional factors, such as the location of an individual's residential real property; social and religious affiliations; business activities; bank accounts; personal property; voting jurisdiction; driver's license; registration of personal property, such as automobiles, boats, and airplanes; and other factors that demonstrate that a particular jurisdiction has the most significant relationship to the individual.

Unlike the mechanical tests that are used to determine residence for income tax purposes under Internal Revenue Code (IRQ section 7701(b), there is no clear, objective standard to ascertain whether an individual is domiciled in the United States. Because there are different standards to determine the application of the federal income tax laws and the federal estate and gift tax laws, it is possible for an individual to be a resident of the United States for federal income tax purposes but not a domiciliary of the United States for federal estate and gift tax purposes, and vice versa.

Federal Estate Taxation of Nonresident Aliens

For federal estate tax purposes, the value of the U.S. gross estate of a nonresident alien consists only of property (including property that is beneficially owned) that is situated, or deemed situated, in the United States at the time of death (JRC section 2103). Importantly, property situated outside the United States generally need not be disclosed to the IRS.

The following sections discuss the general mies that apply when determining the situs of property for U.S. estate tax purposes.

Tangible Personal Property

Tangible personal property of a nonresident alien that is actually located in the United States has a U. …