1 It frequently happens that a Estate taxation of a nonresident alien will purchase a second nonresident alien home in the without realizing that the home will be subject to Estate tax. If the home were instead purchased by a foreign corporation owned by the nonresident alien , Most Estate planners at one time or the home might not be subject to Estate another have occasion to represent tax assuming all the formalities of the individuals or couples at least one of whom corporation were respected (see the is either a noncitizen or a nonresident alien . discussion of corporate stock, below). It may This may be an infrequent enough be prudent to interpose a disregarded occurrence that keeping track of the rules entity, such as an LLC, between the foreign applicable to these clients is difficult. The corporation and the real Estate to facilitate a has unique Estate and gift tax rules potential future sale of the property.
2 If the applicable to resident and nonresident aliens. nonresident alien already owns the home in These rules are relatively complicated, and his or her individual name, it might be in certain respects counterintuitive. An transferred to a foreign corporation but the Estate planner who represents nonresident transfer could be subject to income tax. alien clients, who plan any contact with the , either by spending time in the or Tangible personal property. Art, jewelry, by investing in assets situated in the , furniture, and other tangible personal should be aware that significant taxes may property located in the are subject to be saved if planning is accomplished at an Estate taxation . (Reg 1. early stage. This Practice Alert, which is (a)(2)) This would include cash and excerpted from a more extensive article in collectibles that are stored in a safety deposit the January 2007 issue of Journal of box in the taxation , examines some of the rules applicable to the Estate taxation of a There is an exception for works of nonresident alien .
3 Art imported solely for purposes of exhibition that were on loan (or en route). for those purposes to a public gallery or Gross Estate . In general, US. Estate tax museum with no part of the earnings inuring applies to that portion of a nonresident alien to the benefit of a private shareholder or decedent's gross Estate which at the time of individual at the time of the decedent's his or her death is situated in the , death. (Code Sec. 2 105(c); Reg including but not limited to intangible 1(b)) In addition, tangible personal property property' (Code Sec. 2103). Some of the of a personal nature that a nonresident alien sites rules governing Estate taxation of brings into the while visiting is not assets in a nonresident alien 's Estate are as subject to Estate tax. follows. Stock of a corporation. Shares of stock Real property. Real property located in the issued by a domestic corporation, is subject to Estate tax (Reg irrespective of the location of the (a(l)).)
4 If the property is certificates, are subject to Estate tax. encumbered, and the debt is' recourse (Code Sec. 2104 (a); Reg (a)(5)). (meaning it is the personal obligation of the In IRS Letter Ruling 9748004, IRS applied decedent), the full FMV of the real Estate this rule to impose Estate tax on a unreduced by the mortgage is subject to mutual fund organized as a corporation, Estate tax. even though the mutual fund invested solely include an interest-bearing account with a in foreign securities. bank that is not effectively connected with the conduct of a trade or business in the UPS. Likewise, under Code Sec. 2105(b)(2), Because stock of a foreign a deposit with a foreign branch of a corporation is not subject to Estate tax, domestic corporation or domestic holding situs assets through a foreign partnership is not subject to Estate tax if such corporation constitutes a planning branch is engaged in the commercial opportunity.
5 To the extent the foreign banking business. A deposit with the corporation does not engage in legitimate domestic branch of a foreign corporation, business activities or operate in an arm's- however, can be subject to Estate tax. length fashion, however, there is a risk that Non-bank deposits, such as cash accounts in it will not be respected as an effective shield brokerage firms, are likely to be subject from US. Estate tax. Other foreign entities to Estate tax. may not be considered the equivalent of a corporation but may instead be treated as a trust that is looked through for purposes of Transfers with retained interests. Code determining whether the decedent died Sec. 2035 through Code Sec. 2038 generally owning situs assets. include in a decedent's gross Estate property with respect to which the decedent retained a beneficial interest or control over its Debt obligations.
6 Debt obligations of a disposition. Under Code Sec. 2104(b), any person, or of the , a state, any political transfer described in Code Sec. 2035. subdivision thereof, or the District Of through Code Sec. 2038 by a nonresident Columbia, are subject to Estate tax alien decedent in trust or otherwise will be (Code Sec. 2104(c); Reg (a)(3) subject to Estate tax if the property had and (4)), subject to some significant a situs either when transferred or at the exceptions. time of the nonresident alien 's death. In general, if interest from a debt obligation payable to a nonresident alien is exempt from U: S. income tax, the Beneficial interests in trusts. A beneficial underlying debt obligation is likely to be interest in a trust holding situs assets is exempt from Estate tax. And Code Sec. subject to Estate tax to the extent the 2104 ( ) provides that the rule of Estate tax interest is of a type that would cause the inclusion does not apply to a debt obligation trust corpus to be included in the Estate of a where the interest would be treated as citizen or resident.
7 Income from sources outside the for In Rev Rule 55-163, 1955-1 CB. income tax purposes. 674, IRS ruled that the situs of a beneficial interest in a trust is determined by the situs of the underlying assets. In Rev Rule 82- Certain bank deposits. The situs rules in 193, 82-2 CB 219, IRS ruled that a Code Sec. 2104 and Code Sec. 2105 are nonresident alien 's reversionary interest in a complex with respect to bank deposits, trust holding a bank certificate of deposit which are treated as debt obligations under was not situs property because the bank Reg (a)(7) and Reg 105- deposit was not taxable in the and the 1(k). A deposit with a bank described reversionary interest itself was not situs in Code Sec. 871(i)(3) generally is not property for Estate tax purposes. subject to Estate tax under Code Sec. 2105(b)(1). A deposit not subject to tax would Partnership interests.
8 Neither the Code nor substantial opportunity to avoid Estate the regulations specifically address the situs tax not available to citizens or of Partnership interests for Estate tax residents. purposes, and case law and rulings are The proceeds of a life insurance inconclusive. It seems reasonable to policy owned by a citizen or resident conclude that a nonresident alien 's interest are subject to Estate tax. (Code Sec. in a partnership, particularly if it owns 2042) Accordingly, planning to avoid tax on situs property or is engaged in a the proceeds of a life insurance policy on the trade or business, will be subject to life of a citizen or resident typically Estate tax in the nonresident alien 's Estate . involves transferring ownership of the policy to an irrevocable trust. The proceeds of a life insurance policy on the life of a non All other situations should be evaluated resident alien decedent are not included in according to the available authorities, which the decedent's gross Estate , however, turn on the fundamental question of whether regardless of who owns the policy.
9 The partnership should be respected as a separately identifiable entity. In that event, If a nonresident alien decedent owns the nonresident alien partner would be a policy on the life of another person, and deemed to own intangible property, similar that policy is a situs asset; its value (not to shares of stock. If instead the partnership the proceeds) will be includable in the is seen as a transparent aggregate of its nonresident alien 's gross Estate for underlying assets, the nonresident alien Estate tax purposes. partner would be deemed to own a share of such underlying assets. Deductions from Estate tax. In general, the Estate of a nonresident alien decedent is entitled to deductions under Because it is now possible under the Code Sec. 2106 similar to those allowed to check-the-box rules to form a company the Estate of a citizen or resident under foreign law that will survive the death decedent.
10 Nevertheless (and with certain of an owner, and elect to treat that company exceptions), deductions are permitted only for tax purposes as a partnership, the in proportion to the value that the situs entity theory of taxation of a partnership assets represent relative to the decedent's interest perhaps has gained some additional worldwide Estate . The necessity of support. Nevertheless, the uncertain disclosing worldwide assets in order to take treatment of partnership interests makes deductions may cause certain taxpayers to them difficult Estate planning vehicles to use forgo the benefit in the interest of with confidence. Because an interest in a maintaining nondisclosure with respect to foreign partnership does not attract certain the worldwide Estate . of the more onerous income tax rules applicable to foreign corporations, however, Expenses and debts.