Academic journal article Journal of Accountancy

Transfer Taxes: 5 Questions to Ask Clients with International Ties; Increasing Globalization Raises New Issues for CPAs to Consider When Advising Families, Businesses, and Real Property Owners

Academic journal article Journal of Accountancy

Transfer Taxes: 5 Questions to Ask Clients with International Ties; Increasing Globalization Raises New Issues for CPAs to Consider When Advising Families, Businesses, and Real Property Owners

Article excerpt

With the tremendous amount of wealth transferring into and out of the United States, more and more CPAs are encountering clients with international ties. Whether it is a U.S. citizen with international ties to family, business, or real property, or a U.S. nonresident seeking to immigrate to the United States or acquire U.S. property, these clients bring with them a host of international questions, issues, and potential liability for their advisers.

Although working with these clients can become quite complicated, many of the most crucial issues in the transfer tax arena (i.e., gift, estate, and generation-skipping transfer (GST) taxes) are basic issues that are often overlooked. When advising a client with international ties, the CPA should ask introductory questions to be able to provide comprehensive tax planning advice.

The following is a list of questions that will assist CPAs in spotting the transfer tax planning opportunities that their international clients may have now or in the future. These questions focus on planning, not reporting requirements or compliance, which have been thoroughly discussed in past JofA articles.

1. Is the client a U.S. citizen? If the client is not a U.S. citizen, is he or she currently living in the United States with no present intention to leave?

This question introduces the client to the concept of U.S. residency for U.S. transfer tax purposes. One issue that is often misunderstood is that the test applied to determine if an individual is a U.S. resident for transfer tax purposes is different from the test applied to determine if an individual is a U.S. resident for income tax purposes. As a result, an individual could simultaneously be "domiciled" in the United States and subject to U.S. transfer taxes while also being a U.S. nonresident who is not subject to U.S. income taxes. Clients and their advisers must understand the distinction between the two residency tests before any other planning is considered.

For income tax purposes, the test for whether an individual is a U.S. resident is found in Sec. 7701(b). In brief, an individual is a U.S. resident for income tax purposes if he or she meets one of three requirements: the "green card" test, the substantial presence test, or the first-year election test. While an in-depth analysis of each test is outside the scope of this article, these tests are bright-line tests based on specific requirements for days present in the United States and legal residency status.

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For transfer tax purposes, however, the residency test is a facts-and-circumstances test based on the concept of domicile. An individual is subject to transfer taxes if he or she is a U.S. citizen or is domiciled in the United States at the time of the transfer (i.e., at death for estate tax purposes or at the time of the gift for gift tax purposes). An individual is domiciled in the United States if he or she "acquires a domicile in [the United States] by living there, for even a brief period of time with no definite present intention of moving therefrom" (Regs. Sec. 25.2501-l(b) (gift tax regulations)).

Since the question of domicile is a facts-and-circumstances test, the CPA should inquire about the client's intention to remain in the United States, as well as about other facts that suggest domicile, such as the client's employment history, the situs of real property owned, and the extended family's country of residence. (The remainder of this article refers to an individual who is a noncitizen and a nondomiciliary as a "nonresident" and an individual who is a U.S. citizen or U.S. domiciliary as a "resident.")

2. If the client is a nonresident for transfer tax purposes, does he or she plan to acquire U.S.-sitused property in the future?

Most nonresidents who seek a CPA's advice plan to acquire U.S. assets. While residents are subject to U.S. transfer taxes on their worldwide assets, the rules for nonresidents are based on the "situs" of their assets under Sec. …

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