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:

  • the person’s business;
  • where the person is licensed to drive;
  • where he belongs to church, social or communal organizations;
  • where he has declared his residence to be in, for example, a Will or Trust, an application for a visa or for permanent residence, or tax declarations;
  • where he owns a burial plot;
  • any residence or residences owned by the person (and their degree of use by the person);
  • the person’s family and close friends, and;
  • the person’s personal possessions.

How the domicile factors are weighed:

  • The ownership of a home in another country is indicative of a potential intent to return to that home. The fact that a home in the U.S. is rented or a hotel or other transient facility is utilized supports the same inference.
  • The location of an individual’s family and close friends is a strong indicator of domicile as people are likely to live in the place where their friend and family reside.
  • The fact that a substantial part of an individual’s personal property is located offshore is indicative of intent to return offshore, while on the other hand, moving these items to the United States may indicate the opposite.
  • The location of an individual’s principal business activity may be indicative of his or her domicile as one must ordinarily return there often to supervise employees and supervise the business activity.
  • It is ordinarily advisable for an individual to avoid acquiring documentation and other evidence indicative of long-term U.S. residence if his or her objective is to avoid acquiring U.S. domicile status. However this is often unavoidable.  Even temporary stays in the U.S. may eventually require a local driver’s license that shows a local address, and the use of a U.S. bank account.
  • An individual’s involvement with local organizations, including churches, social and community organizations, ect, May be indicative of an intent to remain indefinitely in the U.S. This is even truer where similar ties with a foreign country were severed upon locating to the U.S.
  • Written legal declaration as to residency such as those contained in a will are indicative of an individual’s intention as to being a resident of a specific local.