This post, was written with the assistance of Joshua Middleton, and follows an earlier piece he wrote. Joshua was born in Zimbabwe and has a lengthy background as an expatriate in the Middle East. Having recently graduated in English Law, he is currently living and working in Dubai, with Holborn Assets Ltd. Josh is now adding some knowledge of US Tax Law to his repertoire. He plans to return to law in the near future and qualify as a solicitor.
One hundred years after its inception, the United States Estate (and Gift) Tax continues to be a contentious, and divisive issue. While there is much debate as to whether it should exist at all, with many advocating for its abolition, some are pushing for the tax parameters to be pushed further. Typically, as has been demonstrated in the current presidential race, Republicans favour repealing the tax while Democrats want to strengthen it. As explored in an earlier blog post, recent events appear to be in favour of strengthening the Estate and Gift Tax.
As most readers may know the US Gift tax is a transfer tax imposed on the transferor of property by way of gifts made during the donor-transferor's lifetime. The tax is imposed each year on the fair market value of assets "transferred" by gift in that year. The Estate tax is a transfer tax imposed on the fair market value of assets in the estate of an individual who has passed away. The tax is paid by the estate for the privilege of passing on or "transferring" assets to the heirs.
Between the Administration's Proposed Budget (released in February 2016) and the recent introduction by House Democrats of a Bill, H.R. 4996, into Congress in April 2016, the rules concerning Estate and Gift tax are under scrutiny, and may face changes in the near future. President Obama's proposed budget for Fiscal Year 2017 and H.R. 4996 propose to restore the Estate and Gift tax parameters that were in place in 2009, with the aim of bringing more households within the thresholds of the tax, thereby increasing tax revenue.
Putting this into numbers, the current 2016 Estate and Gift Tax exemption is $5.45 million per individual, with a maximum tax rate of 40%. Due to the unification of the Gift and Estate tax rules, these figures are contingent upon each other, so any amount of the exclusion used for lifetime giving will not be available to the estate at death. In 2009, the exemption was a less generous $3.5 million for estates, $1 million for lifetime gifts, and the maximum rate was 45%. Unchanged remains the rule permitting individuals to gift $14,000 each to an unlimited number of donees per year. The earlier blog posting analysed these parameters in more depth, addressed how they affect US and Non-US persons, and examined the political undercurrents to the proposals.
As is well known, US persons are subject to income tax on their worldwide income. Concurrently, US persons are also affected by Estate and Gift taxes, with their worldwide assets subject to the tax. Therefore as a general summary, were the proposals to be implemented, US persons living abroad would simply be subject to a more stringent tax regime. However there is a more specific issue, explored below, that would cause the proposed changes to be felt far more acutely by certain US individuals.
This blog posting will address how the potential changes to the Gift and Estate Tax rules would affect a US recipient of a gift or inheritance from a US individual who has expatriated (that is, gave up his US citizenship or a green card held for a substantial period of time).
Troublesome to the expat reader, an increased maximum tax rate would further exacerbate the already punitive tax rules imposed on the US recipient of any gifts or bequests from so-called "covered expatriates". The rules setting out who is a "covered expatriate" can be explored here.
Broadly speaking, gifts or bequests received by US persons from certain former US citizens and long-term residents (so-called "covered expatriates") are taxed to the recipient at the highest Gift and Estate Tax rate. As stated above, this tax under current law is 40%, but if the proposed changes are implemented, "covered" gifts and bequests would be taxed at 45%. Even more concerning, the tax makes no provision for the lifetime exclusion amounts using the Unified Credit, meaning that any gift or bequest from a covered expatriate may be taxed to the US recipient. It is important to note that this law impacts those receiving from former long-term permanent residents and not just former US citizens. (A long-term permanent resident is an individual who held a green card for at least 8 tax years out of the prior 15 tax years before relinquishing the card).
As the government has no jurisdiction over the former US person, it is the US recipient of covered gifts/bequests who is taxed. Under recently proposed Treasury Regulations, a rebuttable presumption is created that any gift from a former US person is ‘covered' unless the US recipient taxpayer can demonstrate otherwise. This places a very high burden of proof on US recipients of gifts from former Americans; the onus is on the recipient to prove that the donor was not a covered expatriate, which can be practically impossible (consider finding the tax returns of a person who expatriated 30 years ago!). Putting all this into an example, if a US citizen (or resident) receives a gift of $1 million from a former US person who qualifies as a "covered expatriate", the recipient can suffer a tax of $400,000 due to the covered expatriate rules. This tax would be raised to $450,000 if the law were to revert to the tax parameters in effect in 2009. For further discussion and advice on the punitive taxes imposed on recipients of gifts/bequests from former Americans, read here.
With this in mind, expats would do well to seek guidance concerning tax ramifications when considering making gifts, and with regard to their estate. Even without a tax hike, the Gift and Estate Tax rules can be of great concern. As always, proper tax planning carried out with due diligence can reduce tax liabilities, and ensure that individuals are not caught out by onerous and complicated rules like those surrounding "covered expatriates". Don't get caught out!Back to Articles Back to Virginia La Torre Jeker J.D.
The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.
Virginia La Torre Jeker J.D.
Virginia La Torre Jeker J.D., is based in Dubai. Virginia has been a member of the New York Bar since 1984 and is also admitted to practice before the United States Tax Court. She has over 30 years of experience specializing in the international aspects of US tax, including FATCA. She has been quoted in the New York Times and Newsweek, and is regularly quoted in many local news articles and publications."
Maastricht University - 5th Global Tax Policy Conference: Tax Policy after BEPS, what can be expected? On 6 September 2019 at the Royal Museums of Arts and History in Brussels, Prof. Dr Hans van den Hurk, chairman of the Annual Global Tax Policy Conference of the Maastricht Centre for Taxation (Maastricht University) with his esteem speakers are addressing the above question.Read more