Determining Status for Estate Tax Purposes

Determining One’s U.S. Estate Tax Status

The impact of the Estate Tax depends on whether an individual is a U.S citizen, a U.S resident or a non resident, non citizen (NRNC). An individual’s status as a citizen, resident or NRNC is significant because the Estate Tax is far more expensive as applied to citizens and residents (as opposed to NRNCs).

Definition of U.S. Citizenship

The only ways to obtain citizenship are via birth or naturalization. Citizenship is granted by the 14thAmendment to the United States Constitution. “All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the state wherein they reside”. For purposes of birthright citizenship, the definition of “United States” includes the fifty states, Puerto Rico, Guam, the Virgin Island, and the Commonwealth of the Northern Mariana Islands. Birthright citizenship is unrelated to intent and applies even when neither parent is a U.S citizen or resident. The rule operates independently of citizenship rules of other countries and extends to people born in the United States who never reside (or intended to reside) in the U.S. As such, it is possible to inadvertently acquire U.S citizenship, due purely to the timing of parental travel.

Non-Citizens: Residency and the Concept of Domicile

The Internal Revenue Code speaks of U.S “residents” and “non-residents” regarding the Estate Code, however, contains no definition of “resident” or “residency” applicable to the imposition of Estate or Gift Tax. Instead, Estate Tax regulations require a determination as to whether an individual has established “domicile” in the U.S. The regulations state that “a person acquires a domicile in a place by living there, for even a brief period of time, with no definite present intention of later removing therefrom”.

Here’s a comprehensive document we previously wrote on domicile – https://www.htj.tax/us-pre-immigration-planning/

To prove that individual is domiciled within the U.S (i.e., a “resident” for Estate and Gift Tax purposes), two factors must be examined. The first factor is whether a person has or had a physical presence in the U.S. The second factor hinges on the individual’s intent to remain in the United States. Because this second element requires a case-by-case examination of intent, categorization is unpredictable.

The U.S income tax rules for determining residency are distinct from the Estate Tax rules. An individual may be a resident for income tax purposes but not for Estate Tax purposes.

Once domicile is established (for Estate Tax purposes), it is presumed to continue until shown to have changed. If an individual previously established U.S domicile, the burden will be on the party asserting non-U.S domicile to prove a change in status. Several court cases address the issue.

In Estate of Khan v. C. I. R. the decedent, a citizen of Pakistan, was held to be a U.S resident at the time of his death. The decedent had substantial ownership interests in a ranching business and a residential real estate enterprise in California (both of which were initially purchased by the decedent’s father). The decedent applied for a U.S social security number and card to preserve subsidies given by the U.S Department of Agriculture to the decedent’s farming operation. Although the decedent spent the vast majority of his life in Pakistan , died without knowing English, and spent fourteen of his last eighteen years exclusively in Pakistan ( facts suggesting no intention to permanently reside in the U.S), the U.S Tax Court treated him as a resident for Estate Tax purposes.

The court places substantial weight on the fact that (i) the vast majority of the decedent’s business assets were located in the U.S., (ii) the decedent had obtained a green card and Social Security number, and (iii) the decedent had applied for a U.S re-entry permit prior to his last trip to Pakistan (although he never returned to the U.S). The Tax Court noted that the decedent would have returned to the U.S but for debilitating medical condition. Curiously, the court also seemed to give weight to the fact that the taxpayer’s family had a history of immigrating to the United States. This family history factor may be a cause for concern from a planning perspective because the intentions of other individuals were apparently imputed to the taxpayer.

Conversely, in the case of Estate of Paquette v. Comr., the taxpayer was a Canadian citizen who split his time between Quebec, Canada and Florida. Although, at the time of his death, the taxpayer owned no physical residence in Canada, the Tax Court determined that he was a non-resident for U.S Estate Tax purposes. The court based its determination on the facts that the decedent (i) chose to reside in Florida instead of Canada for health reasons (the cold weather adversely impacted his medical condition), (ii) maintained investment accounts in Canada, (iii) voted in Canada, (iv) maintained a Canadian driver’s license, (v) registered his vehicle in Canada (vi) executed his will in Canada. This case stands for the proposition that the location of a physical residence does not by itself create a presumption of domicile; rather, “it is merely one of several factors which must be examined to ascertain (a) decedent’s intent”.

Likewise, in the case of Forni v. Comr., the taxpayer was a citizen and resident of Italy. The taxpayer’s wife died with property located in the U.S. As  a result of a Presidential Order issued during World War II, the trust company which held the wife’s assets was prohibited from releasing the property to the taxpayer.

The taxpayer had moved to the U.S claiming residency, but correspondence with his U.S attorneys revealed he had no intention of staying in the U.S longer than necessary to free the assets (and return to his native Italy). The Tax Court held that the decedent lacked the requisite intent to change his domicile and remained a non-resident for U.S Estate Tax purposes.

These cases demonstrate the fact-intensive nature of determining a person’s domicile. It is therefore important to make every effort to establish a clear domicile prior to undertaking estate planning.

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