Death of an expatriate.

AuthorDailey, Paul
PositionTaxation of resident aliens

The American Jobs Creation Act of 2004 (AJCA) has made it more costly for former U.S. citizens and long-term residents (e.g., green-card holders for at least eight of the 15 years before termination of U.S. residency) to die in the U.S. The effective date of the new provisions is for acts of expatriation (including residency terminations) after June 3, 2004.

In addition to annual information reporting requirements, the AJCA requires an expatriate to notify either the Secretary of State or of Homeland Security and to submit an information statement under Sec. 6039G; otherwise, the act of expatriation is invalidated. Note: Residency terminations include electing dual-resident status as afforded under treaty benefits.

Overview

The AJCA revisions to the estate and gift tax rules as applicable to expatriates and long-term residents are as follows.

U.S. presence: First, under AJCA Section 804(c), amending Sec. 877(g) (1), a person is treated as a resident if present in the U.S. for more than 30 days in any calendar year during the 10-year period following expatriation. If death occurs in that same calendar year, the expatriate would be a U.S. resident for estate tax purposes. Thus, the effect is as if expatriation did not occur; all property, wherever situated (including foreign-situs assets), would be included in the gross estate. Likewise, all gratuitous transfers during such calendar year, regardless of where the property is situated, will be subject to gift tax.

Congress was concerned that individuals relinquishing citizenship or terminating residency still wanted "a piece of the pie"--i.e., did not want to fully sever ties with the U.S. and hoped to retain the benefits without taxation. Imposing full U.S. taxation for exceeding a minimal specific threshold of U.S. presence is intended to discourage this behavior. The presence threshold includes any day in the U.S., except for a limited stay while performing services as an employee. The employee must not be related to the employer.

Three tests: Second, pre-AJCA, certain dual residents could rebut the presumption of a principal purpose of tax avoidance by requesting an IRS ruling. The AJCA has eliminated the need for inquiry as to intent of tax avoidance. For a taxpayer who meets any of three Sec. 877(a)(2) tests discussed below, the expatriate rules will apply during the 10-year period following the act of expatriation. (There is a limited exception in Sec. 877(c) for certain dual residents...

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