Historically, to avoid estate tax, the nonresident alien (the term for estate and gift taxes is “non domiciled“) would own their U.S. stock investments or U.S. real estate through a foreign corporation.
Unlike Americans, their estate tax exemption is $60,000 and not $5.2 million.
Before recent court cases to the contrary, using a foreign corporation was good estate tax planning advice.
Some advisors have continued to recommend that a foreign corporation (also known as an offshore corporation) own these investments. However, since the series of tax court decisions (Strangi, Albert, Estate of et al. v. Comm. (05-20-2003) on this link; Bongard, Wayne C., Estate of v. Comm. (03-15-2005); Stone, Eugene E., Estate of III, et al. v. Comm. (11-07-2003); Harper, Morton B., Estate of v. Comm. (05-15-2002); and Kelley, Webster E., Estate of et al. v. Comm. (10-11-2005) this is not advisable.
I have included this link to the Strangi case. If you want to be an expert in this issue, you must read the case.
In these cases, the court ruled that IRC Section 2036 requires assets held by any entity to be included in the taxable estate of any decedent who transferred property to the entity.
Under Section 2036, the property transferred is included in the decedent’s taxable estate because he or she has the right to the income (of the foreign corporation) or the right to enjoy of the property. Please note the word “enjoy”. If you can live on the property, you have the right to enjoy.
For example, Mr. O’Keefe is a citizen and domicile of Ireland. He forms a foreign corporation to purchase real estate in California. As the sole shareholder of the foreign corporation, he has a right to all of the corporation’s income.
And there is more bad tax news. Since Mr. O’Keefe can enjoy the home, section 2036 will also make the home subject to estate taxes.
Thus, the California real estate is subject to U.S. estate tax and generation skipping tax.
Special estate tax laws apply to the nonresident alien, the green card holder and the non domiciled alien. Their estate tax exclusion is limited to $60,000. They are not allowed the marital deduction.
My preferred method of ownership of U.S. assets is the inheritance trust. This is an irrevocable trust. My favorite location for such a trust for the multi-national family, is Nevada. A Nevada Trust can last 365 years.
With my second favorite being New Zealand. New Zealand trust law has a unique tax planning law known as the “advisory trustee”.
Both Nevada and New Zealand allow a family owned private trust company to be the trustee.
If you would have a question, the call or text me, Brian Dooley, CPA, at 949-939-3414.
To learn when an alien is domiciled and the estate tax and gift tax results, please read my blog on this link.