The U.S. imposes an estate or gift tax on the transfer of wealth above a certain threshold exclusion amount. The estate and gift taxes are applicable to the total wealth transferred by U.S. citizens and “U.S. situs” wealth transferred by non-U.S. domiciliaries.
U.S. Citizen/Resident Gift and Estate Tax
U.S. citizens and domiciliaries are subject to estate and gift tax, irrespective of where the property is located. There is an annual exemption from gift tax for first $15,000 gifted per donee per year. U.S. citizens and domiciliaries may also split gifts, allowing married donors to gift up to $30,000 per donee per year without reducing their exclusion amount. However, in order for this “gift split” to apply, both spouses have to be U.S citizens or domiciliaries.
U.S. citizens and domiciliaries benefit from an exclusion of $11.7 million per person before they become subject to gift or estate tax. However, this amount is will sunset in the year 2025 to $5 million, adjusted for inflation; this exclusion is often viewed as remarkably high and could change as President Biden has proposed reducing the amount in order to collect more tax revenue from the wealthiest Americans.
Non-Domiciliary Gift and Estate Tax
Non-U.S. domiciliaries are only subject to gift tax on transfers of U.S.-situs property. This includes tangible personal property located in the U.S. as well as real estate located in the U.S. and stock of U.S. corporations.
Thoughtful estate and gift planning can lead to lower U.S. tax obligations. Non-U.S. domiciliaries who live, work, or own property in the U.S. should have an understanding of the U.S. estate and gift tax obligations. You should establish an estate plan early to reduce the possible burden under the current exclusion threshold and adjust the plan as necessary for future life changes and updates to the law.
One option to consider is to set up an exemption trust. This is established as an irrevocable trust, which means that it cannot be changed or invalidated without the permission of the trust beneficiary. The primary benefit of the irrevocable trust is that it removes assets from the grantor’s taxable estate, shrinking the estate’s size and potential tax liability.
Another option is to adopt a gifting strategy. As mentioned previously, each year, an individual can gift up to $15,000 to another individual without any tax consequences. Therefore, if an individual or couple has assets in excess of their needs, they may be able to substantially reduce their taxable estate by making annual, lifetime gifts to their heirs. For example, a couple with four kids could gift $30,000 per child without any tax consequences and reduce the size of their estate by $120,000 annually.
There are other powerful estate planning tools that can eliminate the future appreciation of your assets from the amount of your estate while you retain full control of the assets. A determination of what strategy will be best for you and your family should be performed on a case-by-case basis in order to implement the most efficient plan.