Don’t Overlook International Estate and Gift Tax Treaties

Gift and estate tax issues can be especially complex in the case of an individual whose domicile or property spans multiple countries. Each country has its own gift and estate tax laws, and when a decedent resides in one country while owning property in another, the estate may be subject to both higher and duplicative taxes.

A huge potential variable is the existence of an estate and gift tax treaty between the countries entitled to tax a decedent’s estate. These treaties – which the United States has entered into with 16 countries – can help allocate tax liability between countries, lessen or eliminate double taxation, and provide additional relief in the form of special credits, deductions, and exemptions. Given the significant financial consequences that a tax treaty can have, attorneys, accountants, and other estate planning and tax professionals must recognize when international tax considerations are implicated and also whether one or more tax treaties will impact those considerations.

The U.S. taxes the estates of citizens and residents distinctly from the estates of non-citizens residing elsewhere. Citizens and residents benefit from a $5.49 million estate tax exemption that increases annually for inflation. Because of this exemption, only the largest estates are subject to any tax. This is not the case for the estates of non-residents, for which heirs are limited to a set $60,000 exemption that is not indexed to inflation. If the taxable estate exceeds $60,000, it will be taxed at a rate ranging from 26-40%.

In addition to heightened U.S. estate tax liability, the estates of those whose lives and property spanned multiple countries may be subject to double taxation. All assets of non-U.S. residents “domiciled” in the United States at death are subject to U.S. estate tax on their assets, regardless of the country in which those assets are located. Assets located in the United States are subject to U.S. estate tax even if the decedent was domiciled elsewhere. Such assets include not only real and tangible property, but also stock and other ownership interests in U.S. businesses. Of course, to the extent an individual was a citizen or resident of another country, or owned property in another country, such countries will also seek to collect taxes.

Whether an individual is domiciled in the U.S. – meaning all worldwide possessions are subject to U.S. estate tax – is not always obvious. An individual need not be a lawful permanent resident (“green card” holder) to be domiciled in the U.S. and thus subject to U.S. estate tax. Nor is the question of whether an individual is subject to U.S. income tax dispositive on estate tax liability. Rather, individuals are deemed to be domiciled in the United States if they were present in the United States at the time of their death with no specific intention of leaving. This is a subjective test that looks at several factors, but it may be satisfied even for individuals who were only present in the United States for a short period of time.

The issue is even more complicated depending on the countries involved. The U.S. currently has estate and gift tax treaties with Australia, Austria, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, Norway, South Africa, Sweden, Switzerland, and the United Kingdom. These treaties vary in nature, but have potential benefits both to tax professionals attempting to navigate trans-border estate tax issues – for example, in determining the decedent’s country of domicile – and also to the heirs of such estates, for whom such treaties may significantly decrease tax liability. Canadian residents, for example, can claim a portion of the $5.49 million exemption typically reserved for U.S. citizens and residents. U.K. residents enjoy even more favorable terms, receiving the full exemption typically reserved for U.S. citizens and residents. Tax treaties can also offer some relief in the case of a transfer to a non-resident surviving spouse.

Given the significant financial ramifications that treaties can have on tax liability for international estates, tax professionals must at least be able to recognize when a treaty may be implicated. Such situations include when a decedent owned property in a treaty nation, or when a non-resident decedent or surviving spouse are citizens or residents of a treaty nation. If a treaty is implicated, tax professionals must determine whether they are qualified to plan or administer the estate in accordance with the treaty themselves or if it would be preferable to refer the matter to a subject matter expert.

Photo by Joanna Kosinska on Unsplash
Kevin Moore, Founder of Kevin J. Moore & Associates, is focused in the areas of estate planning, trusts and probate services with additional expertise in both domestic and international business transactions and tax planning and tax controversy representation for individuals and companies.