Federal estate and gift taxation of nonresident aliens

 

As noted above, the determination of "nonresident alien" status under the estate and gift tax regime is different from the determination under the income tax regime.
Under the estate and gift tax regime, an alien is a non-resident of the U.S. if his or her domicile is outside the United States.
Domicile is acquired through residence with the intent to remain in the U.S. indefinitely, thus it is a factual determination.33

Foreigners are subject to the federal estate and gift taxation only to the extent of their interests in U.S. situs property.34
Furthermore, each state has its own laws governing estate taxation of foreigners, therefore, the laws of each state in which a decedent owns property must be examined to determine applicability (Florida does not have a state estate tax).

In general, U.S. situs property includes property physically located within the U.S., subject to a number of exceptions.35
Although a precise definition of "U.S. situs property" is not provided by the IRC, suffice it to say that, for the purposes of this article, real property located within the U.S. and stocks in a U.S. corporation are deemed U.S. situs properties.

However, gifts of U.S. situs intangible property, except in the case of a U.S. expatriate or long-term resident, are not subject to the gift tax.36
That is, if the foreign investor titles the U.S. real property interest in his individual name and subsequently gifts the ownership interest, the transfer is subject to U.S. gift taxation.
However, where the foreign investor titles the U.S. real property interest in the name of an entity, such as an LLC or a corporation, a transfer of his or her interest in the entity will be deemed a transfer of an intangible asset and, therefore, will not be subject to the gift tax.

Unless modified37 by a transfer tax treaty38, a foreigner is subject to the same estate and gift tax rates as a U.S. person, with a few differences.39
The most significant of the differences relates to the allowable exemptions and deductions.
Where, for 2011 and 2012, a U.S. person is allowed a $5 million unified estate and gift tax exemption and an unlimited marital deduction for transfers to a U.S. spouse, a foreigner is limited to a $13,000 estate tax credit (based on a $60,000 estate tax exemption) and no estate tax marital deduction to a foreign spouse,40 although the foreigner may utilize a qualified domestic trust to transfer U.S. situs property to the foreign spouse in order to take advantage of the full marital deduction.41
Nonetheless, a foreigner is allowed the same annual gift tax exclusion as a US person (currently $13,000 per person) and a gift tax deduction for gifts to a foreign spouse (currently $133,000).42

Stock in a foreign corporation, however, is not deemed to be U.S. situs property and, therefore, is not subject to estate or gift taxation when transferred or bequeathed by a foreigner.43
Accordingly, as opposed to the outcome under the income tax regime, from a gift and estate tax perspective, ownership of U.S. real property interests through a foreign corporation is the more tax-efficient approach.