§ 11.4 Federal Estate, Gift, and Gst Tax

• Library: Rights of Foreign Nationals (OSBar) (2020 Ed.)

§ 11.4 FEDERAL ESTATE, GIFT, AND GST TAX

The focus of § 11.4-1 to § 11.4-5 is on transfer taxation rather than the income tax matters covered in chapter 8. Unless otherwise stated, general references to "transfer taxes" include estate taxes, gift taxes, and generation-skipping taxes on the federal level. Where context warrants, the term also refers to the Oregon estate tax. The structure of transfer taxes is reviewed only to the degree necessary to illustrate how foreign nationals are treated differently from U.S. citizens. The Bureau of National Affairs, Inc. (BNA) has produced several tax-management portfolios that address tax matters in great detail. Much of the content of this part of the chapter is drawn directly from information available in those BNA portfolios.

§ 11.4-1 Primary Issues for Transfer Tax Purposes

Federal transfer tax may be imposed on (1) U.S. citizens, (2) U.S. residents, and (3) property located in the U.S. owned by nonresident noncitizens. IRC § 2001; IRC § 2101. A brief discussion about determining citizenship, residency, and location of property follows in § 11.4-1(b) to § 11.4-1(d). It is important to note that the framework applicable to transfer taxes is different from the framework applicable to income taxes. For example, it is possible to be a resident alien for income tax purposes, but a nonresident noncitizen for transfer tax purposes. See chapter 8. For a more detailed discussion of residency, citizenship, and location of property, see Michael A. Heimos, Non-Citizens—Estate, Gift and Generation-Skipping Taxation, 837-2d Tax Mgmt (BNA) A-15 (2005).

§ 11.4-1(a) Definitions

For transfer tax purposes, the term resident not a citizen of the United States (RNC) means a noncitizen of the United States who is a resident of the United States as determined by the subjective "domicile" test. See IRC § 2001(a).

The term nonresident not a citizen of the United States (NRNC) means a person who is neither a citizen nor a resident of the United States. See IRC § 2101(a).

PRACTICE TIP: Because of the impacts of being designated an RNC or an NRNC, it is beneficial to the client to begin planning before arrival in the United States. A thorough discussion of planning issues (tax and nontax) is provided in Michael A. Heimos, Non-Citizens—Estate, Gift and Generation-Skipping Taxation, 837-2d Tax Mgmt (BNA) VII.E-VIII, X (2005), including, among other things, use of foreign trusts, foreign partnerships, and foreign insurance products.

§ 11.4-1(b) Citizenship

As stated in § 11.4, determining whether a person is a U.S. citizen is the threshold question of transfer tax treatment. Unfortunately, what should be an easy question is complicated in some situations. Some potential problem areas are outlined below.

Under the Fourteenth Amendment to the United States Constitution and 8 USC § 1401(a), a person born in the United States and subject to the jurisdiction of the United States is a citizen by birth. (See 8 USC § 1401 generally for the definition of who is a national or citizen by birth.) The Fourteenth Amendment also applies to persons naturalized in the United States. The Supreme Court, in interpreting the "born" language of the Fourteenth Amendment, held that it confers citizenship by birth on a person born in the United States, regardless of the citizenship of the person's parents, with some narrow exceptions, such as the parents having been employed in some diplomatic or official capacity under the foreign sovereign. United States v. Wong Kim Ark, 169 US 649, 693-94, 18 S Ct 456, 42 L Ed 890 (1898). Some, but not all, situations that warrant a more thorough review of the client's status are as follows:

(1) The person was born outside the United States to parents who are both U.S. citizens, but there is some doubt that both parents had ever actually resided in the United States before the person's birth. See 8 USC § 1401(c).

(2) The person was born abroad, in wedlock, to parents, one who is a U.S. citizen and the other who is not a citizen, but the citizen parent did not physically reside in the United States for the required period of time. See 8 USC § 1401(d).

(3) The person was born abroad, to unmarried parents, one who is a U.S. citizen and the other who is not. In this context, the treatment is different based on whether the mother or the father is the U.S. citizen. See 8 USC § 1409.

The foregoing is not an exhaustive list, but it identifies likely scenarios that may be presented to an estate planner. If anything is unusual about a person's birth, more analysis is needed. For instance, was the person born on a U.S. ship, and if so, was it a merchant vessel or a naval vessel?

Finally, two observations can be made about citizenship as it relates to estate planning. The first observation is that with respect to married clients, the citizenship of both spouses matters. Two married citizens are treated differently for transfer tax purposes from a couple consisting of a U.S. citizen and a noncitizen or two noncitizens. See chapter 5 for a discussion about who are spouses in this context.

The second...