Donor's Estate and Gift Tax

Donor's Estate and Gift Tax

A.     Concept of Residency

A U.S. resident for estate and tax purposes is a person whose primary residence, or domicile, is in the United States.  This means that the person lives in the United States and has no definite present intent to leave, as shown by the surrounding facts and circumstances.  Certain elements taken in consideration are the purchase of a residence, estate planning documents, and location of the closest family members.

B.     Tax Status of U.S. Residents

The status is the same as U.S. citizens for gift and estate tax purposes.  The taxation is on their worldwide assets. 

C.     International Treaties

You should be familiar with the International Treaties on gift and estate tax which may exist.  Keep in mind that many countries are limiting the double taxation effect.  Countries accept to not tax twice their citizens but want to ensure that their citizens pay their tax.  You will have often to prepare and file two tax declarations, one for each country.  The IRS only give a tax credit and if not tax is collected by the other country, the IRS may collect tax.  For instance, a U.S. citizen gives French real estate to his children.  Under the international treaty between France and the U.S., French tax will apply to the transaction because it is real estate.  If the U.S. donor does not pay tax in France on this gift, then the U.S. may.  The donor will have to file a gift tax declaration in France and one in the U.S.  In the U.S. gift tax return, the French gift tax is reported on line 13 of the Form 709 as credit for foreign gift taxes.  One of the immediate consequence for the donor is the use of a portion of his $1 million life time gift exemption.

D.    Tax Status of a Non U.S. Resident

They are subject to U.S. estate and gift tax only on U.S. situs assets. 

1.     Estate Tax

The estate tax is assessed at the same rates as for U.S. citizens, up to 45%, but with only a $60,000 exemption.

Worldwide debts and administration expenses may be deducted, but only in the proportion that the U.S. assets bear to the decedent’s worldwide assets. 

The unlimited deduction is available if the surviving spouse is U.S. citizen or if the assets are left in a QDOT trust.  The charitable deduction is available only for bequests to U.S. charities. 

Example of U.S. situs assets for estate tax purposes:

·         Real estate property located in the U.S., including houses and condominiums.

·         Tangible personal property located in the U.S., such as jewelry, antiques, artworks and cars, unless the items are in transit or on loan for an exhibition.

·         Shares of stock of U.S. corporations, including shares of a U.S. co-operative corporation representing a co-op apartment.  Shares of non-U.S. corporations are not U.S. situs property.  The location of the certificate is immaterial. 

·         Cash deposits with U.S. brokers, money market accounts with U.S. mutual funds and cash in U.S. safe deposit boxes are U.S. situs.

2.     Gift Tax

The non-residents are subject to gift tax only on gifts of U.S. situs real property and tangible personal property; including gifts of cash that take place within the U.S.[4]  Gifts of shares of stock of U.S. corporations are not subject to U.S. gift tax. 

 The annual exclusion of a present interest may be applied.  However, the $60,000 credit for estate tax does not apply.

Part 3: Estate and Gift Tax from the Donee’s Side

A.     Non-Citizen Spouse

1.     Joint Property

The Economic Recovery Tax Act (ERTA) of 1976 created a presumption for couples that joint property or properties held as tenant by the entirety are owned 50% by each spouse[5].  This is an irrefutable presumption but for properties acquired before the ERTA.  Prior to this law, the surviving spouse had to justify his/her contribution the joint property. 

The presumption created by ERTA does not apply to non-U.S. citizen spouse[6] Actually, the IRS will presume that the decedent-spouse own 100% of the interest in the joint property.  The non-U.S. citizen spouse will have to prove his/her contribution. 

Therefore, when you meet with clients where one of them is a non-U.S. citizen, you have to collect information on the percentage of the contribution and discuss the method they use to keep track of the contribution. 

2.     Unlimited Marital Deduction and QDOT Truts

The Economic Recovery Tax Act (ERTA) of 1976 has created an unlimited marital deduction.  One of the objectives of the Act was to correct the discrepancy in tax treatment between the community states and the non-community state.  Community states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.   In a community state, upon the death of the first spouse, community assets are divided in half and only one half is reported the decedent taxable estate.  A home maker surviving spouse in a non-community state could have ended having no interest and the entire assets could have been reported in the decedent gross estate even though assets were held as tenant by the entirety.  A home maker surviving spouse in a community state would always keep half of the assets of the community and it’s only the other half of the community assets would be reported in the decedent gross estate. 

Another objective of ERTA was to help avoiding double taxation.  The property bequeathed to the surviving spouse could be taxed a second time in the surviving spouse’s estate.  Finally, ERTA was to help unify the IRS treatment of husband and wife.  The IRS already treated the husband and wife as “one economic unit” for income tax purpose.  ERTA expanded this concept for estate and gift tax. 

ETRA created an unlimited marital deduction for the surviving spouse rather than a tax exemption.  The assets received by the surviving spouse remain included in the decedent’s gross estate.  The assets bequeathed to the spouse are treated as deductions and are reported under schedule M of the federal estate tax return.  The property bequeathed to the spouse can be held into a marital trust and still qualify as a deduction.  The surviving spouse should either have a general power of appointment or all of the income of the trust shall be paid to the surviving spouse.

This presumption does not apply to non-U.S. citizen spouse.  The underlying purpose of this exception for non-U.S. citizen spouse was the concerns that a non-U.S. citizen spouse may transfer the assets oversea prior to her/his death and/or move permanently to her/his country of origin.  Therefore, the IRS could not collect the tax on the death of the surviving spouse. 

However, the assets bequeathed to non-U.S. citizen spouse could qualify as an unlimited marital deduction if the spouse become a U.S. citizen before the filing of the tax return or the assets are held in a QDOT (or QDT) trust.  Even when the decedent’s spouse estate planning does not provide for the creation of QDOT trust, the surviving spouse can request to the IRS the creation of such a trust.  To qualify as a QDOT trust, the trust must meet the following requirements:

1.      The trust must pay all income to the surviving spouse for life.

2.      The trust may not permit principal distributions to anyone other than the surviving spouse during the surviving spouse life.

3.       The trust must have at least one U.S. trustee, and the U.S. trustee or trustees must have the power to withhold estate tax on any such distribution.

4.      For trusts of over $2 million, there must be either a U.S. institutional trustee (a U.S. bank or U.S. branch of a foreign bank), or a bond or letter of credit in an amount equal to 65% of the initial value of the trust assets.  There is an exclusion for up to $600,000 of real property (one or two residences and their contents used by the spouse, but apparently not for cooperative apartments) to determine the amount of the bond or letter of credit.

5.      For trusts of under $2 million, if over 65% of the trust assets, constitute offshore real property, there must be either a U.S. institutional trustee or the posting of a bond or letter of credit in an amount equal to 65% of the initial value of the trust assets. 

 The QDOT trust has some disadvantages.  Any principal distributions to the surviving spouse (except distribution for hardship) will be subject to estate tax at the time of distribution at the top bracket of the deceased spouse.  The remaining principal in the trust on the death of the second spouse will also be subject to estate tax in the estate of the first spouse.  In another words, on the death of the second spouse, the estate tax return of the first spouse needs to be reopened.  The trust assets will be taxed at the rate in existence at the time of the first spouse’s death. 

If the surviving spouse becomes a U.S. citizen at the return is filed, the QDOT trust can be terminated and all assets can be paid outright to the spouse.  However, principal distributions made prior to the spouse becoming a U.S. citizen will still be taxed.    

3.     Annual Exclusion

Spouse can make to each other unlimited gifts without gift tax consequences.  However, if a donee spouse is a non-U.S. citizen, the donor spouse may only give up to $133,000[7] per year to the donee spouse without gift tax consequences. 

These annual gifts must be either outright or in a trust that qualifies them as gifts of a present interest.  They must also be in a form that would qualify for the marital deduction if the spouse were a U.S. person.  Any gifts in excess of this amount will be subject to gifts tax, although the unified credit is available if the donor spouse is a U.S. citizen or resident. 

B.     Assets received from Abroad

Any U.S. person who receives large gifts from a foreign person during any calendar year must file a report describing these gifts by completing and filing IRS Form 3520.  A foreign person can either be a foreign individual or a foreign entity: corporation, partnership, trust or estate.

Large gifts[8] are defined as;

·         Gifts or bequests valued at more than $100,000 received by a U.S. person from all foreign donors; or

·         Gifts valued at more than $13,258 (adjusted annually for inflation) from foreign corporations or foreign partnerships (including foreign persons related to the foreign corporations or foreign partnerships).


Payment of qualified tuition or medical payments are not considered gifts.  

Under a new law effective as of June 17, 2008, gifts from individuals who ceased to be a U.S. citizen or a green card holder may be subject to special rules.   “Covered gift or bequest” of more than $12,000[9] from a “covered expatriate” should report the amount on line 57 of the return and the Form 708 needs to be completed and filed.   The IRS is developing the Form 708[10]. 

While there is no tax on gifts from foreign persons, the penalty for failure to report the gifts is severe.  The individual may be penalized if Form 3520 is not filed on time or is incomplete or inaccurate.  Generally, the penalty is 5% of the amount of the foreign gift for each month for which the failure to report continues (not to exceed a total of 25%).