H. Jacob Lager

When do I become a US “estate tax” resident? The shocking truth revealed!

In IRS regulations on April 16, 2012 at 12:32 pm

Well, maybe it’s not “shocking,” but it may be a bit surprising.  Last week, we discussed the estate tax planning benefits of “drop off” trusts for incoming foreign nationals.  One major point to remember from that post is that a drop off trust will only work if it’s funded prior to your estate becoming subject to US estate taxes.

The question remains, when are you subject to estate taxes?  Surprisingly, your subjectability to estate tax does not necessarily coincide with time you become subject to US income taxation.

While income tax residence is governed by a series of objective rules (the “green card” test, the “183 day” test, and a number of tax treaty modifications), estate tax “domiciliary” is determined by a much more subjective facts-and-circumstances test.  This means your estate may not be subject to US estate tax even though you have already obtained lawful permanent residence status.

A US estate tax domicile is established if you: (a) are living in the US and have the intention to remain in the US indefinitely; or (b) have lived in the US with such an intention and have not formed the intention to remain indefinitely in another country.   The focus on “intent” introduces a wide breadth of subjectivity (some might say “planning opportunity”) to when US domiciliary is established.  Often, the determination can turn on the location of your primary residence and where you carry on your family, social, religious, and business relations and activities.

Some of the factors which the IRS examines are: (i) the length of time you spent in the US and abroad and the amount of your travel to and from the US and between other countries; (ii) the value, size, and locations of your homes and whether they are owned or rented; (iii) whether you reside in a locale due to poor health, for pleasure, or for political reasons; (iv) where your valuable or meaningful tangible personal property is located; (v) where your close friends and family reside; (vi) where your religious and social and civic affiliations are located; (vii) where your main business interests are situated; (viii) your visa status; (ix) your stated residence on legal documents; (x)  your voter’s registration; (xi)  your driver’s license issuing jurisdiction; and (xii) your income tax filing status.

So, let’s assume you, a foreign national, are comfortable with claiming non-US domiciliary status and that you want to go forward with a drop-off trust.  What could go wrong? (Enter foreboding music.)

Answer coming next week in Part Three!

 

Photo courtesy of lalunablanca

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  1. Great info for my clients who just moved to the US to be closer to grandkids. They still have a house in their home country and spend about 50% of the time here. Wondering your thoughts on “intent”?

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