Update on Estate Taxation of Non-Resident Aliens

The CPA Journal, October 1992 | Go to article overview

Update on Estate Taxation of Non-Resident Aliens


National boundaries are becoming more open, and international business transactions involving several countries are commonplace. U.S. income taxation of transactions of entities residing in one country and doing business in another is a complex subject and a very difficult area of law to administer. Our estate and gift taxation of individuals residing in one country and owning property in another country has also had a long and difficult evolution.

Before the enactment of the TRA 76, a U.S. citizen could actually move out of the country, renounce citizenship, and escape our estate and gift taxes. TRA 76 included new Sec. 2107 to curb this practice. The taxable estates of former U.S. citizens are taxable as if they were citizens if they die within ten years of losing citizenship, unless it is proven that estate tax avoidance was not a principal purpose of the expatriation. Even after TRA 76, non-resident aliens continued to benefit from a special tax rate schedule. The general trend of changes in the estate and gift taxation of non-resident aliens has been to tax these individuals much the same as U.S. citizens when these individuals own property in the U.S. Amendments contained in TRA 88 are consistent with this trend.

The estate and gift tax rate on U.S. citizens and resident aliens now begins at 18% on the first $10,000 of taxable transfers and reaches 55% on taxable transfers over $3 million. The unified credit of $132,800 is deducted from the gross gift or estate tax in arriving at the net tax payable. A foreign death taxes credit, a state death taxes credit, a credit for gift taxes paid, a credit for taxes on prior transfers, and a credit for death taxes on remainders is available in appropriate circumstances. The marital deduction is permitted for certain property passing to a surviving spouse.

As of November 11, 1988 non-resident aliens no longer enjoy a special tax rate. TAMRA 88 included amendments to provide that the same rates apply to non-resident aliens as to U.S. citizens and resident aliens under Sec. 2001(c) for decedents dying after November 10, 1988. TAMRA 88 also amended the amounts of unified credit allowed to non-resident aliens and of marital deduction available for property passing to a non-citizen spouse.

THE GROSS ESTATE OF A NON-RESIDENT ALIEN

The gross estate of a non-resident alien generally consists of the same items as that of a U.S. citizen or resident if these items are located in this country. As with the estates of citizens and residents, the calculation of the gross estate of non-resident aliens is the most complex part of computing the estate tax.

In the modern world of international finance, the lines between domestic and foreign proper blur easily. Secs. 2104 and 2105 provide guidance as to what property is and is not included in the gross estate.

PROPERTY SPECIFICALLY INCLUDED IN THE ESTATE

Under sec. 2104, property within the U.S. includes 1) stock of a domestic corporation, whether or not the certificates are physically located within the U.S.; 2) property transferred to which the transfer sections apply if such property was situated in the U.S. either at the time of the transfer or at the time of the decedent's death; and 3) certain debt obligations of a U.S. person (artificial or human), or of the U.S., itself or a political subdivision of the U.S.

Shares of stock owned and held by a non-resident alien are property within the U.S. only if issued by a domestic corporation. Shares of stock of foreign corporations are not deemed property within the U.S., even though the certificates are physically located within the U.S. on the date of decedent's demise. Debt obligations of U.S. corporations that have derived less than 20% of their gross income from U.S. sources for the three years prior to the non-resident's death are not included in the gross estate. Deposits in U.S. banks, mutual banks, savings and loan association accounts and with a domestic branch of a foreign corporation are deemed property within the U.

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Update on Estate Taxation of Non-Resident Aliens
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