Foreign partnerships in estate tax planning for NRAs.

• Author: Carsalade, Rafael
• Position: Nonresident aliens

In 2000, total U.S. gross estates of nonresident aliens (NRAs) reported on U.S. estate tax returns exceeded $132 million; see Jacobson, "Federal Estate Tax Returns Filed for Nonresident Aliens, 1999 and 2000," Statistics of Income Bulletin (Summer 2002), available at www.irs.gov/ pub/irs-soi/00nraest.pdf. For assets directly owned by NRAs, estate taxes of up to 55% may apply at the time such property is transferred at the NRA'S death. Much of this tax can be eliminated with proper planning, but at potentially significant income tax costs.

Using foreign partnerships to hold U.S. assets of NRAs can bring significant estate and income tax benefits over the more traditional foreign corporation. However, their significant uncertainty for estate tax purposes has generally discouraged such use for estate tax planning. In some cases when it may be possible to reduce or mitigate these risks, the potential benefits of foreign partnerships could turn them into a more widely used estate tax planning vehicle.

NRA Estate Taxation--General Rules

The method of computing estate taxes on an NRA'S gross estate is basically the same as that for a U.S. citizen or resident, except that the NRA'S estate is taxed only to the extent of its U.S.-situs property, and it receives a much smaller unified credit. Generally, under Pegs. Sec. 20.2104-1(a), the situs of estate property depends on where it was located when the NRA died. One important exception under Regs. Sec. 20.2104-1(a)(5), is the situs of domestic corporate stock, which is determined by the place of incorporation. Thus, according to Pegs. Sec. 20.2105-1(f), stock in a U.S. corporation owned by an NRA is deemed situated in the U.S. and subject to estate tax, even if the shares and/or corporate assets are physically present outside the U.S. Likewise, stock in a non-U.S. corporation is deemed to be situated outside the U.S., even when the stock or assets are physically in the U.S.

While the above situs rules are clear, no clear rules for determining situs of partnership interests exist in the Code, regulations or any other authority. Further, the IRS generally will not issue determinations on the imposition of estate tax while a taxpayer is alive. Such unpredictability has discouraged the use of partnerships for estate planning by foreign estates. Although the Code does not provide a situs for foreign partnerships, it does provide for income sourcing; see Regs. Secs. 1.861-1(a) and 1.864-4(a). U.S.-sourced...