Just because you don't live here, don't think the government won't find you!

A healthy dose of paranoia for a Friday morning!

What on earth I am referring to with the title this week?  Taxes.  Specifically, the estate tax and how it applies to foreign nationals.  As muddy as the future of the estate tax is for a U.S. citizen, it is doubly confusing (or more!) for non-citizens either residing here permanently or simply owning property here. 

The first source of confusion is the set of rules that determine if the individual is either a "U.S. Domiciliary" or a Non-U.S. Domiciliary" (bonus points if you can say the last sentence out loud with correct pronunciation on the first try)?  As clear as the rules are for income taxation, the estate tax domicile rules are anything but clear and are defined as follow:

A "resident" decedent is a decedent who, at the time of his death, had his domicile in the U.S.  A person acquires domicile in a place by living there, for even a brief period of time, with no definite intention of later removing therefrom...." Treas. Reg. § 301.7701(b)-3

What?!

Let's put that aside for a minute and take a look at the ramifications of which side of the domicile equation you end up on.

If you are a U.S. Domiciliary:

You fall under the estate laws that are in place at the time of death (only 6 more months to go with "no estate tax"!).  Just like a U.S. citizen, your WORLDWIDE assets are included in these calculations.  Ouch. 

If you are a Non-U.S. Domiciliary:

Estate tax is due on all U.S. situs property.  OK, that stinks, but I have the unlimited marital deduction and exemption, right?  WRONG!  No unlimited marital deduction, and a mere $60K exemption.  That house in La Jolla or Coronado?  Go ahead and hand over the title to the feds unless you come up with the cash to pay the tax.  Obviously not as painful as taxation of worldwide assets, but probably a bit of a shock for most heirs and property owners alike.

Why do I go in to this?  As with any planning, each layer of complexity brings with it a unique set of challenges, and planning with foreign nationals is certainly complex.  Take another look at the bit from the Treasury Department above and imagine trying to anticipate who is or is not a U.S. Domiciliary when planning? 

The other point is that the usual estate tax rules that insurance carriers apply to financial underwriting are horribly flawed if they do not take these rather unique rules into account.  My experience in this market tells me that unless we bring it to the underwriter's attention, they will apply the traditional formulas every time.  The challenge that presents in justifying the proper amount of insurance is obvious.  Working with an expert in this area is critical!

OK, one last thought - I am creeping ever closer to sounding like an attorney each week.  Obviously, I'm not, and this information is presented for discussion purposes only.  Special thanks to Jon Schimmer at Procopi- Cory for keeping me up to speed on this topic.  Reminds me yet again that great planning is a team sport.

Have a great weekend,