The term “multinational resident” refers to an individual who is associated with two or more countries. Multinational residents are mostly soldiers. Multinational residents can reside and own property in the United States, or they can live and own property in other countries. Under federal law, these people can be classified as US citizens, foreign residents, or non-resident foreigners.
Many multinational residents believe that when they die, assets they own abroad do not have to pay the US federal inheritance tax. However, the implementation of the U.S. inheritance tax law is very strict and non-discriminatory. Multinational residents are likely to pay the same inheritance tax.
The United States Federal Heritage Tax Law divides taxpayers into three categories, they are
Citizens
Foreign residents
Non-resident foreigners
CITIZEN
This refers to a person born in the United States or naturalized under the jurisdiction of its jurisdiction. The federal estate tax law applies to the taxable estate of United States citizens, including all assets anywhere in the world.
NON-CITIZEN/RESIDENT ALIEN
Resident alien refers to those who are not US citizens, but lawful permanent residents of the United States. The federal estate tax law also applies to the taxable estate of foreign residents, the same as US citizens, including all their assets anywhere in the world.
NON-RESIDENT ALIEN
If a person is not a U.S. citizen and lives outside the United States at the time of death, the person is regarded as a non-resident alien. The inheritance tax law also applies to the taxable inheritance of non-resident foreigners but only includes their property in the United States.
WHAT SPECIAL ESTATE PLANNING STRATEGIES CAN BE APPLIED TO MULTINATIONAL RESIDENTS?
1. Annual gift tax exemption – A gift tax is a federal tax applied to an individual giving anything that has value to another person. For something to be considered a gift by the IRS the receiving party cannot pay the giver full value for the gift received but though they may pay an amount less than its full value. The giver of the gift is required to pay the federal gift tax. Under special circumstances, the receiver of the gift may pay the federal gift tax.
In 2020, United States citizens, foreign residents, and non-resident foreigners can each give $15,000 to a grantee each year without having to pay gift tax. The number of recipients is not limited. If the gift is not given directly to the recipient (for example, through a trust), and there is no proper planning, then the gift may not enjoy the annual tax-free gift.
2. Split gifting – In 2020 , a couple can share their annual gift tax exemption and split the gift of $30,000 or less to a recipient without paying gift tax. This split gift only applies to couples of American citizens and foreign residents. Non-resident foreigners are not eligible for split gifting. In states where the Community Property Act is implemented, there is no need to divide the couple’s gift, because the money donated from the common property is treated as if each spouse gave half of their own property. Each eligible spouse can independently enjoy the annual gift tax exemption for common property without splitting the gift.
3. Marriage waiver of gift tax – The unlimited gift tax marriage waiver is only applicable to gifts to spouses of US citizens between spouses, but not to gifts to spouses of non-US citizens. Gifts given to spouses of US citizens by foreign residents or non-resident foreign spouses can also enjoy gift tax marriage exemption. If the gift is not given directly to the spouse recipient (for example, through a trust) and there is no proper planning, the gift may not be eligible for unlimited marriage exemption from gift tax. Property given to a living non-citizen spouse must first be transferred to a Qualified Domestic Trust (Qualified Domestic Trust) in order to meet the marriage exemption.
4. The annual gift tax exemption between spouses-The gift between spouses to non-citizen spouses can enjoy a special annual gift tax exemption of $157,000 in 2020 instead of the annual exemption of $15,000. The amount was $147,000 in 2019. Non-resident foreigners’ gifts to non-citizen spouses also apply. This means that non-citizen spouses cannot receive more than $157,000 without being subject to the gift tax.
5. Gift tax exemption amount – US citizens and foreign residents may apply for the applicable gift tax exemption amount. The annual gift tax exclusion is $15,000 per recipient. The 2020 lifetime federal gift tax exclusion or exemption amount is $11,580,000 for a single donor. It was 11.4 million dollars in 2019. However, non-resident foreigners are not eligible for this applicable gift tax exemption, but can only enjoy the lower applicable exemption of $60,000 inheritance tax.
Here is an example of the Gift Tax. A taxpayer gives $20,000 to each of five recipients in 2020. Because the annual exclusion limit is now $15,000 per person, $25,000 of the total amount given is not excluded. However, the non-excluded amount reduces the lifetime exemption amount. So, after making these gifts, the taxpayer has $11,555,000 (initially from $11,580,000) remaining of the exemption to give before paying gift taxes.
Here are some few ways you can avoid inheritance tax:
Giving your assets away – If you give away your assets are you are alive for the next 7 years, then all gifts are free and you can avoid paying inheritance tax.
Putting your assets in a trust – If you do this, it won’t form part of your estate in case you kick the bucket. Doing this can also be beneficial for your children
Taking out your life insurance – Take out your life insurance policy and place in a trust to make sure it is paid outside of your estate. This takes care of any potential inheritance tax bill.
Offer something to the charity – If you leave about 10% of your total assets to charity, then the inheritance tax rate will reduce by a certain percentage.
Make sure you are below the threshold of inheritance tax.
HOW MULTINATIONAL RESIDENTS AVOID INHERITANCE TAX