Estate planning for international clients.

• Author: Phillips, Matthew S.

With increasing globalization of the world's economies, the pitfalls for wealthy clients with international business interests and assets have increased. It is essential for these clients with multiple citizenship or residency to understand that the timing and manner of cross-border wealth transfers fundamentally affect their ability to minimize tax burdens.

Is the donor a U.S. citizen or domiciled in the U.S.?

If a donor or decedent is a U.S. citizen or domiciled in the United States, all gifts made and assets owned worldwide at death are subject to U.S. transfer tax in the absence of a relevant gift or estate tax treaty (Sec. 2001(a)). In addition, even if a taxpayer has no connection with the United States (i.e., is not a citizen or domiciliary) but passes away with certain types of property located in the United States, the estate tax applies to the U.S. situs property regardless of the taxpayer's citizenship or residency, as long as an estate tax treaty does not supersede (Sec. 2103).

What creates U.S. domicile for estate and gift tax purposes?

Treasury regulations explain that a person can establish domicile by living in a place for even a brief period with no definite, present intention of moving (Regs. Sec. 20.0-l(b)(l)). "Residence without the requisite intention to remain indefinitely," on the other hand, "will not suffice to constitute domicile, nor will intention to change domicile effect such a change unless accompanied by actual removal" (Regs. Sec. 20.0-l(b)(l)). This test requires a facts-and-circumstances analysis that looks into a variety of factors, such as citizenship in another country and the location of investment assets, driver's registration, bank accounts, homes, etc. Domicile is presumed to continue in a foreign jurisdiction until it is established in the United States (In re Estate of Paquette T.C. Memo. 1983-571). For example, in Paquette, a Canadian citizen spent the last 25 winters of his life in Florida, where he owned a home. He was deemed not to have created domicile in the United States because his numerous contacts with Canada, such as citizenship, maintaining a home and conducting his banking there, and holding a valid Canadian driver's license, supported the presumption of continued domicile there.

Domicile is separate from income tax residency

Because estate and gift tax domicile in the United States is not necessarily the same as income tax residency, it is possible to acquire income tax residence without becoming domiciled in the United States for estate and gift tax purposes. Income tax residency is based on meeting one of two criteria. Under the first criterion, the "substantial presence test," a person is a...