U.S. transfer taxes include gift tax, generation-skipping transfer tax and estate tax and can apply during the life or at the death of a Non Resident Non-Citizen in limited circumstances. The US transfer taxation of foreign investors within the U.S. is one of the most sophisticated topics in U.S. taxation. From a policy perspective a balance is attempted to be achieved between the goals of assessing and imposing transfer taxation on nonresident non-citizens on the one side and attracting their investment dollars into the U.S. economy on the other. To this end, the Internal Revenue Code contains several statutory exemptions from U.S. transfer taxes for certain types of domestic investments that are held by the Non Resident Non-Citizen.
High-net-worth nonresident non-citizens often invest in U.S.-situs investments to maintain a balanced and diversified international portfolio. The U.S. is considered one of the safest places on earth to make investments. They often educate their children at American colleges and Universities or run U.S. businesses, which often results in their having U.S. resident children. It is also common for high-net-worth nonresident non-citizens to spend recreational time within the United States and, therefore, they may own valuable U.S. vacation properties, and other U.S.-situs recreational property such as yachts.
As a general rule, U.S. transfer tax code only reaches their property that has U.S. situs, and the code contains several exclusions that further restrain the reach of U.S. transfer taxation. Consequently, nonresident non-citizens may be able to plan their financial affairs to reduce or eliminate U.S. transfer taxes. The Non Resident Non Citizen’s domiciliary status is the single most important factor at play in limiting the reach of U.S. transfer taxes as the attainment of U.S. domiciliary status, by becoming a resident of the U.S., opens up the Non Resident Non-Citizen to global U.S. transfer taxation.
Regulatory Definition of Domicile
Congress has not specifically defined transfer tax definitions for the terms “resident” and “nonresident.” The internal revenue regulations rather define the concept of “domicile.” A resident for transfer tax purposes is a decedent who, at the time of his or her death, had his or her domicile in the United States,” and a nonresident decedent is a decedent who, at the time of his or her death, had his or her domicile outside the United States. 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 themselves therefrom. They state further that residence without the requisite intention to remain indefinitely will not suffice to constitute domicile, nor will intention to change domicile effect such a change unless accompanied by actual removal. In general, the domicile of an individual is his or her true, fixed, and permanent home and place of habitation. It is the place to which, whenever he or she is absent, he or she has the intention of returning.
The Difference Between Income and Transfer Tax Definitions of Residency
The income tax and transfer tax residency definitions are completely different. The transfer tax sense of the term “resident” focuses on the “squishy” concept of “domicile” within the United States, whereas the income tax definition of “resident alien” focuses on an objective set of finite standards defined under IRC §7701(b). A single individual may simultaneously be a resident alien for income tax purposes but not a resident for transfer tax purposes, and vice versa.
Domicile cases to date have generally held that where an alien comes into to the United States for a specific purpose and intends to leave the U.S. after that purpose has been accomplished, but without knowing exactly how long it will take to accomplish his or her purpose, then he or she is not domiciled in the United States for transfer tax purposes because the definite present intention to leave when the purpose is accomplished prevents the stay from being considered indefinite in determining residency. Purposes to be in the U.S. that indicate non-domicile status include, in the U.S. to; obtain medical care, to fulfill a temporary job assignment with a definite termination date, to avoid temporary political strife in his or her home country or simply to take a vacation.
Although intention constitutes a state of mind, the courts look to objective criteria to make the determination. The two objective factors courts focus on are (1) the length of stay, and (2) the situs of interests. The situs of interests is a more comprehensive analysis of the person’s situation. Among the factors to consider are the locations of:
How the domicile factors are weighed: