XVIII.   Estate Tax Planning

Like income tax, estate and gift tax applies to US citizens and residents living abroad. However, beware of the special rules relating to resident and non-resident aliens. For US citizens who are married to another US citizen, there is an unlimited marital deduction, so that the estate can pass to the surviving spouse without estate or gift taxes.

For Americans living abroad, it can be vital to understand in which country one is likely to be subject to Estate Tax. Whilst the US Estate Tax may seem high, it can be much higher in other countries. With careful planning, it may be possible to avoid or minimize Estate Tax in countries where the tax is higher than in the USA.

However, if the surviving spouse is a resident or non-resident alien, then there is no marital deduction, unless the property passes to a qualified domestic trust (QDOT). Even if the property is held in joint ownership, the property may be subject to full taxation.

Estate Tax: There is also the unified credit available to citizens and resident aliens. The exclusion is $675,000 on assets for 2000 and 2001, increasing to $1,000,000 in 2002 and 2003; $1,500,000 in 2004 and 2005; $2,000,000 in 2006, 2007 and 2008 and then increasing to $3.5 million in 2009 after which the tax is reinstated in 2011 with a unified exclusion of $1,000,000. (The Republicans want to abolish the tax entirely, whereas the Democrats do not - so who knows what will really happen.) 

Estate tax returns have to be filed if the gross amount of the estate is more than the applicable unified credit.

The gross US estate of a nonresident alien is subject to  estate tax, including bonds and debts obligations, but not cash.

A decedent who is a nonresident alien is subject to  gift tax on transfers of real (not intangible) property located in the USA.

Gift Tax: It is integrated with the estate tax, however, the exemptions are now different. For gift tax there is an annual exclusion of $10,000 for 2001 and $11,000 for 2002. Gift tax returns must be filed for gifts in excess of  the annual exclusion amount. However, for gifts by citizens to a spouse who is not a US citizen, the exclusion is $106,000 for 2001 and $110,000 for 2002.

The annual gift tax unified credit from 2002 onwards is $345,800 which is an exclusion amount of $1,000,000.

Generally the following are not taxable gifts and are not counted in the annual exclusion / unified credit: Medical / tuition exclusions; gifts to a spouse, political organization or charity.