ALI-ABA Course of Study International Trust and Estate Planning ...

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22 property). 97 Subject to certain limitations, this transferred basis may be increased (but never in excess of the fair market value of the property at the time of the gift) by the amount of gift tax paid on the transfer. 98 2. Nonresident Aliens A nonresident alien is subject to gift tax with respect to a narrower class of property than a resident alien. A nonresident alien is subject to gift tax only when he makes a gift of real or tangible personal property situated in the United States. 99 Thus, a gift of U.S. real estate by a nonresident alien will be subject to gift tax, 100 but a gift of intangible personal property by a nonresident alien will not be subject to gift tax. 101 Nonresident aliens are not entitled to the "unified credit" accorded to resident aliens. 102 Nevertheless, nonresident aliens are entitled to the $12,000 annual exclusion for gifts to any person, the unlimited exclusion for gifts to defray educational or medical expenses, the unlimited exclusion for gifts to citizen spouses, and the $120,000 annual exclusion for gifts to non-citizen spouses. 103 Nonresident aliens are permitted to transfer an unlimited amount of property to charity free of gift tax; provided, however, that the gift is made either to (i) a U.S. corporate charity or U.S. war veterans organization; or (ii) a trust, community chest, fund, foundation, or fraternal society (wherever organized), but only if the gift is to be used within the United States. 104 The basis of property acquired by gift from a nonresident alien is determined in the same manner as the basis of property acquired by gift from a resident alien. 105 B. Estate Tax 1. Resident Aliens Resident aliens are subject to U.S. federal estate tax on the transfer of their taxable estates. 106 A decedent's taxable estate is equal to his gross estate, which consists of "the value at the time of his death of all [of his] property, real or personal, tangible or intangible, 97 98 99 100 101 102 103 104 105 106 See §1015. However, for purposes of determining a loss, the donee's basis in the property will equal the lesser of the resident alien's basis or the fair market value of the property at the time of the gift. §1015(a). See §1015(d). §2501(a)(1); §2511(a); Treas. Reg. §25.2511-1(b). Treas. Reg. §25.2511-3(b)(1) (providing that U.S. real estate is considered situated in the United States for gift tax purposes). §2501(a)(2). See §2505(a). Neither are nonresident aliens entitled to a reduced credit comparable to the credit allowed to them for estate tax purposes. See infra Section VI.B.2. §2503(b); §2503(e); Treas. Reg. §25.2523(i)-1(a) and (c)(2). §2522(b). See supra notes 96-97 and accompanying text. §2001(a). {00187507-1} 18
23 wherever situated," 107 less certain deductions. 108 Thus, just as resident aliens are subject to income tax on their worldwide income, they are also subject to estate tax on their worldwide assets. Resident aliens are permitted an unlimited deduction from their gross estates for property transferred to a U.S. citizen spouse. 109 A transfer to a non-citizen spouse is not deductible unless it is made through the medium of a "qualified domestic trust." 110 A "qualified domestic trust" is a trust that meets the following requirements: The trust instrument must require that at least one trustee be a U.S. citizen or a U.S. corporation; The trust instrument must require that no distribution of trust corpus may be made unless a U.S. citizen or a U.S. corporation who is a trustee has the right to withhold the tax imposed by Section 2056A from the distribution; The trust must meet the (numerous) requirements imposed by the Treasury Regulations, which are designed to ensure the collection of the tax imposed by Section 2056A; and An election must be made by the decedent's executor to have Section 2056A apply to the trust. 111 Resident aliens are entitled to deduct from their gross estates certain expenses, indebtedness, taxes, losses, and charitable contributions. 112 As mentioned above, the estate tax rates currently range from 18% to 47%. 113 The tax rate applicable to a resident alien's taxable estate is determined after taking into account his lifetime taxable gifts. 114 A person who acquires property from a resident alien decedent will generally take a "stepped-up" basis in the property (i.e., a basis equal to the fair market value of the property at the date of the decedent's death). 115 107 108 109 110 111 112 113 114 115 §2031(a). §2051. §2056(a). However, resident aliens are generally not entitled to deduct a transfer of a life estate or other terminable interest in property to a citizen spouse. See §2056(b). §2056(d). §2056A(a). See §2053-55. §2001(c)(1). §2001(b). The amount of estate tax is actually determined by (i) applying the appropriate rate(s) from the unified rate schedule to the combined value of the lifetime gifts and estate of the decedent and (ii) deducting the portion of such tax that is attributable to the lifetime gifts. Id. See §1014. This rule also applies to property owned by certain types of trusts created by the decedent. However, there are a number of important exceptions to this general rule. The basis of stock in a foreign corporation that is classified as a passive foreign (Footnote continued) {00187507-1} 19
Page 1 and 2: 1 ALI-ABA Course of Study Internati
Page 3 and 4: 3 PAGE 1 a. Derek Jeter (change of
Page 5 and 6: 5 I. INTRODUCTION 2 This outline ad
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