I received a call from an old client who had retired and moved away. The client had met a prospective spouse who was a citizen of a civil law country, and they were discussing marriage. In addition, they were also discussing moving permanently to a third country, where neither one was a citizen or resident. The client had question about pre-nuptial agreements, choice of laws, and tax issues. One of my questions, which troubled my client, was the length of time that the prospective spouse had spent in the United States and whether permanent residency had been already acquired.
I was, in turn, asked what would happen if the client relinquished United States citizenship. The answer is somewhat complicated. U.S. citizens, having a net worth of $2,000,000 or average income over 5 years of $145,000, who become expatriates, have a number of issues with which to deal. These include whether to make a mark-to-market gain recognition or elect to defer gain. In addition, if the U.S. person successfully becomes an expatriate, any United States citizens or residents who receive a bequest from the ex-pat are then subject under §877A of the Internal Revenue Code to an inheritance tax (See IRC §2801). Yes, §2801 is a federal inheritance tax. The client at issue here has children that will remain in the United States and be the objects of the client’s bounty. I also cautioned the client that civil law jurisdictions have forced heirship that prevents one spouse from disinheriting the other...
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