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.
