Code §2801 imposes U.S. transfer taxes on transfers by former U.S. persons who have expatriated if the transfer is to a U.S. person. This tax is imposed on the U.S. recipient. A recent article by Joseph Toce, Jr. and Joseph Kluemper points out several planning considerations for such expatriates if they have U.S. persons who will be recipients of gifts or testamentary transfers. These include:
a. Making Lifetime Gifts of Property to U.S. Persons that are Subject to U.S. Gift Tax Instead of Testamentary Transfers. Under normal U.S. gift tax rules, gift taxes are tax-exclusive if the donor survives the gift by three years. That is, the taxes themselves are not considered by the gift – there is no tax on the tax. However, §2801 taxes are tax inclusive – thus, they are taxed at higher effective rates. So, similar to the same considerations that apply to U.S. donors, a lifetime gift bears less taxes than a testamentary gift. Since this does not work if the gift is taxed under §2801, the gift must be of property that is otherwise subject to U.S. gift taxes aside from the expatriate status of the donor. This is because §2801 will not apply to a gift of a nonresident that is otherwise subject to U.S. gift taxes. Thus, the donor should use property that is U.S. situs property for gift tax purposes, such as U.S. real property, to make the gift.
b. Make Use of Double Annual Exclusion Gifts. It is likely that if a donor makes an annual exclusion gift of U.S. situs property and of non-U.S. situs, each gift can benefit from a $14,000 annual exclusion. One exclusion is the regular exclusion that applies to U.S. situs assets under the regular gift tax rules, and the second is the annual exclusion that is granted to the donee under §2801.
c. Consider Making Generation Skipping Transfers of Non-U.S. Situs Assets. Transfers of non-U.S. situs assets will still be subject to tax under §2801. However, there is no GST tax under §2801 so when appropriate, a generation skip can be included in the transfer to avoid future transfer taxes.
d. Carefully Allocate U.S. Situs Property and Non-U.S. Situs Property Between U.S. and non-U.S. Recipients. The goal here is to transfer the U.S. situs property to the U.S. people, since it will be taxed under the normal nonresident transfer rules or §2801 – either way. This leaves non-U.S. situs property to go to nonresidents, free of U.S. transfer taxes – if U.S. situs property is instead transferred to them, then U.S. transfer taxes would apply.
Estate Planning for Expatriates Under Chapter 15, by Joseph Toce, Jr. and Joseph Kluemper, published in the January 2013 issue of Estate Planning Journal