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How U.S. Tax Rules Apply to Inheritances and Gifts from Abroad
As people become more globally mobile, estate planning attorneys are being asked questions about the income, estate, and gift tax ramifications relating to property from outside the United States. One of the questions most frequently being asked, for instance, is whether an inheritance or gift from abroad will be taxed if brought into the U.S.
The short answer is that the U.S. doesn't impose inheritance taxes on bequests. Similarly, transfers by gift of property not situated in the U.S. from foreign nationals not domiciled in the U.S. are not subject to U.S. gift taxes. However, many other U.S. tax rules may apply to such a gift or inheritance.
This article describes the U.S. tax rules that apply to transfers by gift or inheritance of property from abroad to U.S. citizens, U.S. lawful permanent residents ("green card" holders), or foreign nationals residing in the United States.
U.S. Estate Taxes
The estate and gift tax rules of the Internal Revenue Code include two basic structures for transfers by bequest. One structure covers death transfers by U.S. citizens regardless of where they are domiciled at death. This structure, with some exceptions for transfers to non-U.S. citizen spouses, applies to estates of foreign nationals who are domiciled in the United States.
Foreign nationals who are green card holders are generally considered domiciled in the United States for both U.S. estate and gift tax purposes. This is consistent with the immigration law definition of a U.S. lawful permanent resident as an individual who intends to reside permanently in the United States.
Foreign nationals residing in the United States, but without green cards, may be considered domiciled in the United States for purposes of these tax rules as well. Transfers by foreign nationals not domiciled in the United States are covered by a different estate tax structure that imposes taxes on transfers of certain property situated in the United States.
Estate taxes based on the Code rules may be changed by an estate or gift tax treaty. The United States has estate tax treaties with several countries.
As long as the decedent who transfers the asset by bequest or is neither a U.S. citizen nor a foreign national domiciled in the United States, no U.S. estate tax is imposed on the transfer. The United States does not impose inheritance taxes on the beneficiary's receipt of a bequest, therefore there is no U.S. tax resulting from the death transfer. Also, the United States also does not impose an income tax on inheritances brought into the United States. However, other U.S. reporting and tax rules may apply to the asset.
U.S. Gift Taxes
The U.S. gift tax rules apply to gratuitous transfers by U.S. citizens and foreign nationals domiciled in the United States regardless of the location of the asset transferred. Certain exemptions apply to gifts regardless of the domicile of the donor or location of the asset. As with the gift tax rules for U.S. citizens, there is an annual exclusion of $10,000 per donor for each donee gift. Gift splitting is not available to foreign nationals not domiciled in the United States. Gifts to U.S. citizen spouses are free of gift tax. Gifts of up to $100,000 per year to a non-U.S. citizens spouse can be given free of tax.
Gifts by foreign nationals not domiciled in the United States are subject to U.S. gift tax rules only if the asset transferred is situated in the United States (referred to as "U.S. situs" property). Whether property is U.S. situs for purposes of these rules is defined by arcane rules found in sections 2104 and 2105 of the Code.
In general, U.S. real estate and tangible personal property that is located in the United States is U.S. situs property but intangibles are not. (However, intangibles such as stock in U.S. companies or debt instruments of U.S. entities or governments are situated in the United States for U.S. estate tax purposes.) Special rules apply to treat U.S. bank accounts as situated outside the United States.
The United States has gift tax treaties, either separate or in combination with estate tax treaties with a number of countries. These treaties may eliminate the U.S. gift tax on certain transfers that are otherwise subject to U.S. gift taxes under the Code. An exemption from gift tax under a treaty is made on a gift tax return. The applicable treaty must be analyzed for application to the transfer.