If you are a in the US on an H-1B visa and have more than $60,000 in assets here, keep reading. The United States Federal Estate Tax applies to you. The tax will apply differently to you based on whether you intend to return to your home country or already consider the US home and you plan to stay. Either way, the tax is very likely more a significant issue than you realize. Planning is appropriate.
The first question to ask is whether you are a “Resident” or a “Non-Resident.” It would seem to go without saying that a foreign person on a temporary work assignment in the US would be a “Non-Resident” for Federal Estate Tax (the “death tax”) purposes. The problem is that the death tax and immigration laws are independent of one another and it is possible for a “temporary worker” to be a US “Resident.”
Resident or Non-Resident. An H-1B visa is a work visa for a foreign national on a temporary assignment for the purpose of meeting the needs of an employer.
In the death tax context, the question arises whether the client is a “resident” or “non-resident” for death tax purposes. This question revolves around the client’s intent as demonstrated by facts and circumstances. In other words, do the client’s actions demonstrate an intent to remain here in the US? Is the US now an indefinite home for the client? If so, then the clients very well may be “Residents” for death tax purposes even though they are here temporarily for immigration purposes. However, if the client has definite plans to leave the US and return “home” to their home country, then the client is a “Non-Resident” for death tax purposes.
The consequences of being a “Resident” or a “Non-Resident” are very different.
Non-Residents. With respect to Non-Residents, the US imposes a death tax only on their assets situated in the US. This will include real estate, tangible personal property (i.e., stuff), stock in US corporations, US or local municipal bonds, and any property that might otherwise be included under death tax rules.
Notably, life insurance proceeds are excluded from the gross estate of the non-resident regardless of whether the issuing company is a US company or not.
The federal estate tax exemption for the non-resident is $60,000. This is not adjusted for inflation.
There is also a severe limitation on deductions for death tax purposes. Generally, deductions such as funeral expenses are limited in the proportion that US assets bears to worldwide assets.
Perhaps most importantly, no marital deduction is generally available to bequests by a Non-Resident to a non-citizen spouse. This can really hit a client unexpectedly. Even joint accounts and the home (if held jointly) are subject to this rule. However, an unlimited marital deduction can be obtained through use of a Qualified Domestic Trust (QDOT) which must have a US Citizen Trustee or US Corporate Trustee. For trusts over $2 million, there are additional requirements on the trustee.
Thus, a non-Resident married couple should generally avoid bringing assets to the US and should hold their US assets separately. They should have Wills which leave US situated assets to one another in a QDOT.
It should be noted that QDOT does not eliminate the tax. Rather, it defers the death tax until distributions are made to the surviving non-citizen spouse or upon the death of the spouse. The death tax must be paid eventually.
There is an unlimited charitable deduction to US Charities.
While the Federal Gift Tax applies in a similar fashion, the Gift Tax is not as significant of an issue with one notable exception. Transfers between spouses can potentially result in unintended gift tax issues. You should know that there is an inflation adjusted annual exclusion of $149,000 (for 2017). Gifts to a spouse of US assets valued at $149,000 annually are exempt from the tax.
Regarding Generation Skipping Transfers, the tax generally applies in the same fashion as it does to US Citizens and Residents. The lifetime exemption for GST purposes is $1 million.
Residents. Residents are taxed on worldwide assets in the same way that US Citizens are taxed. They are also entitled to a full $5,470,000 exemption (for 2017). Click here to read more on the death tax.
As with Non-Residents there is no marital deduction and the same issues regarding marital gifts during life and at death discussed above for non-residents applies to Resident Non-Citizens.
Planning is Essential. Please know that planning for this tax can save hundreds of thousands of dollars in taxes especially if you are currently considered a Non-Resident and are contemplating calling the US home. There are significant planning opportunities for Non-Residents that are considering making the US their permanent home. If you are already a Resident, then it may be too late to take advantage of some opportunities. However, either way, it is important to plan so that your estate is prepared for the tax.