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Non-Citizen Gifting Gotchas – Governmental Gives and Takes

Wealthy non-citizens who live in the U.S., but who are not certain whether they are subject to U.S. gift and estate taxes, can (in some cases) take advantage of the new law to hedge their gifting.

Often, American citizens aren’t the only ones subject to American taxes. So, it isn’t only American citizens who have something to gain from the recent tax law changes. We’ve all been given a generous tax windfall for 2011 and 2012 when it comes to gift and estate taxes, and, according to a recent article in Private Wealth, it may be an especially windfall for wealthy non-citizens.

For a wealthy non-citizen residing in the U.S., the problem is their possible tax liabilities lie within a hazy zone between a “domiciled resident” and a “non-domiciled resident.” The initial guidelines for determining domicile status are (1) they must reside in the U.S. and (2) they intend to reside in the U.S. indefinitely. While the fact of residence is fairly easily ascertained, it is the “intent” issue where a number of factors come into play (like residence size, organizational memberships, and the location of burial plots). Oftentimes, it is difficult to predict what the IRS will conclude. Accordingly, you might never know with certainty whether you are or are not a domiciled resident.

The difference in taxes is vast. A domiciled resident is subject to U.S. gift and estate taxes on all assets, whereas a non-domiciled resident is only subject to taxes on U.S.-based assets (physical ones, usually, such as art). If you know you are a non-domiciled resident, then you can transfer massive amounts of wealth without U.S taxation – and it might be wise to do so. However, if it is later determined that you were, in the opinion of the IRS, domiciled, then you’ll be subject to tax, interest, and possible penalties. That wouldn’t be a pleasant surprise, to say the least.

The idea, then, is to play it safe. Hedge your bets by transferring assets as though you were domiciled. You’ll still be transferring assets, but you’ll be safer doing so. The sooner the better for domiciled, non-domiciled, and citizen alike, however, since we’re only guaranteed the present exemptions until the end of 2012.

The original article goes into far more depth, and certainly more information can be found there. Nevertheless, if this issue may touch or concern you, then you should meet with counsel to assess your potential liability… and the best way to hedge your bets.

Reference: Private Wealth (July 2011) “Foreigners and the Gift Tax

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