Immigration Issues: Estate Taxes for Immigrants to the U.S.
The estate tax implications for wealthy non-residents who contemplate coming to the United States are often overlooked by immigration attorneys, whose primary concern is securing lawful permanent resident status and eventual citizenship for their clients. Failure to consider the estate and gift tax implications of becoming a green card holder can result in unintended consequences, particularly in cases where non-residents have amassed substantial wealth overseas prior to coming to the United States. In certain instances, a decision to pursue lawful permanent resident status may be ill advised and could potentially expose the immigration attorney to malpractice claims.
The following discussion is intended for those immigration attorneys, who may not have the benefit of a firm partner, or colleague who is versed in the U.S. estate and gift tax rules. The most common cases involve a petition for an alien relative (immediate family relative) where a U.S. citizen is sponsoring a parent who has a substantial net worth overseas.
The U.S. federal government imposes three major taxes, including federal income tax, federal estate tax; and federal gift tax. Local governments, such as states and municipalities, may also impose their own taxes. For purposes of this discussion, we will only concern ourselves with the U.S. estate and gift tax laws and certain financial reporting obligations. The filing requirements as well as the tax implications are predicated upon residence and the situs of the decedent’s assets.
“Determining an individual’s domicile or residence for estate and gift tax purposes is fact specific.” IRM 18.104.22.168.1 (1)
A “U.S. domiciliary “is defined as a person who is physically present in the United States with no present intent of leaving. The term “resident” for estate and gift tax purposes is different than residency for income tax purposes.Accordingly, a person may be considered a resident for U.S. income tax purposes but not for estate and gift tax purposes. Once a non-citizen establishes the United States as their domicile, they remain a United State domiciliary until a new domicile is established.
The IRS will consider the following factors in determining whether a person is considered a U.S. domiciliary or resident for estate and gift tax purposes:
- Intention evidenced by statements in visa applications, tax returns and the existence of a last will and testament.
- Status in the United States (i.e. visitor or green card holder).
- Length of U.S. residence and whether continuous.
- Lifestyle in the United States and overseas.
- The individual’s ties to the foreign country.
- Location of business interests.
- The location of church affiliations and clubs.
- Where the person is registered to vote.
- The issuance of a driver’s license.
In addition, the existence of an estate tax treaty between the United States and a foreign country may provide certain rules designed to minimize and avoid double taxation in situations where both countries have the right to tax the decedent under local law. Estate tax mitigation is accomplished
“by providing primary and secondary taxing rights, situs rules, and special rules dealing with credits, deductions and exemptions.” IRM 22.214.171.124 (1).
For a list of Estate and Gift Tax Treaties please see https://www.irs.gov/businesses/small-businesses-self-employed/estate-gift-tax-treaties-international
A United States citizen or a U.S. domiciliary is subject to tax on gifts made during their lifetime and on their property, wherever located, when they die. A non-citizen who is not considered a U.S. domiciliary is also subject to federal estate and gift tax, but only on assets situated in the United States, the value of which exceeds $60,000.U.S.situated assets include U.S. real estate, tangible personal property, and securities of U.S. companies. A nonresident’s stock holdings in an American company are subject to estate taxation even though the nonresident held the certificate abroad or registered the certificate in the name of a nominee.
If a non-resident is considered to be a resident for estate and gift tax purposes, his or her worldwide assetswill be subject to the estate tax regardless of whether that person was an income tax resident.
Generally, U.S. citizens and U.S. Domiciliaries are subject to federal estate and gift tax on worldwide assets exceeding the exemption amount.The 2016 estate and gift tax exemption is $5.45 million per individual, up from $5.43 million in 2015. The federal estate and gift tax each impose a maximum rate of 40 percent.A non-citizen, who is not considered a U.S. domiciliary, is not eligible for the $5.45 million exemption.
The following case illustrates the problems that are created when an immigration attorney fails to consult with a tax attorney. Estate and gift taxes are be a moving target and must be considered in the context of the client’s objectives.
Gupta Korah is a United States naturalized citizen and resides in Piscataway, New Jersey. Gupta came to the U.S. 1998 on a student visa and attended Princeton University, where she received a Bachelor’s degree. She is now employed as a senior analyst with an IT Consulting firm in Princeton, New Jersey.
While attending school Gupta met Samuel Korah, a U.S. Citizen and the two were married in 2001. Gupta subsequently obtained permanent lawful resident status and shortly thereafter became a naturalized citizen. They have two children ages 2 and 6.
Gupta’s father, Sanjay Patel and mother, Neetham Patel are citizens of India and were in their late sixties at the time of entry into the United States. . Sanjay and Neetham are both internists who have practiced medicine for over thirty years and would like to retire. The couple was able to amass a substantial estate worth over $12 million dollars, consisting of mixed use real estate in Chennai, cash, stocks and bonds and a 50% share in a medical practice group. Gupta is their only child.
In 2009, Gupta convinces her parents to retire and move to the United States in order to help with the grandchildren. After some discussion her parents decide that they would like to become lawful permanent residents. In February 2010 Sanjay and Neetham contact and make an appointment with a U.S. immigration attorney who maintains an office in Chennai, India.
On February 15, 2010 Sanjay and Neetham meet with the immigration attorney. Gupta also participates in the meeting from New Jersey via Skype. During the meeting the attorney gathers the necessary information and documentation he will need in order to file a Petition for Alien Relative (I-130). The Petition provides that Gupta is the sponsor and that her parents are the beneficiaries. The attorney requests that Gupta provide certain documentation for purposes of sponsoring her parents, including a copy of her U.S. Passport, New Jersey Driver’s License, Birth Certificate and copies of Gupta’s Federal and New Jersey Income Tax Returns for the past three years.These documents are digitally provided by Gupta during the meeting. While the immigration attorney is competent in the area of immigration, he lacks even the minimum knowledge to be able to identify estate and gift tax or U.S. income tax issues.
The immigration attorney focuses his attention on processing the Petition, but fails ask any questions concerning Sanjay and Neetham’s assets.
Following the initial meeting, the attorney prepares Form 1-130 and Form 1-864 and send the forms to Gupta by email. Gupta prints out the documents and signs them. The Petition and Form I-130 are sent to the attorney via DHL without incident. The immigration attorney receives the signed documents and arranges for Sanjay and Neetham to come to his office to sign the Petition and other papers. The Petition is thereafter filed together with appropriate attachments and the filing fee.
On April 11, 2011, Gupta’s parents receive notification from UCSIS that their conditional status as lawful permanent residents has been approved. Sanjay and Neetham arrive in New Jersey on May 5, 2011. Sanjay and Neethaminitially stay with Gupta and her husband until they are able to sell their interest in the medical practice and purchase a home in New Jersey. Since their arrival on May 5, 2011, Sanjay and Neetham have continuously resided in New Jersey, without interruption.
On September 17, 2012 Sanjay and Neetham sell their interest in the medical practice for $1,150,000. On October 12, 2012, Sanjay and Neetham use part of the proceeds to purchase a single family home in Monmouth Junction, New Jersey for $950,000. The remainder of the sale proceeds is used for moving expenses, the purchase of new furniture and an automobile. Sanjay and Neetham are able to get New Jersey Driver’s licenses, establish bank accounts and also join an Indian Social Club. Neetham also secures a part time job teaching anatomy at Raritan Community College. Finally, the couple joins a local mosque on U.S. 1 in South Brunswick, New Jersey and become very active in social and charitable functions.
In March of 2013, Sanjay is diagnosed with advanced stage pancreatic cancer. He dies six months later. Neetham suffers from heart disease and diabetes. On October 14, 2015 she is hospitalized at Robert John Medical Center in New Brunswick, in order to stabilize the spike in her blood sugar levels. Three days later, she is released and returns home. On November 11, 2015 Neetham suffers a massive stroke. She is taken to Robert Johnson Medical Center. Ten days later she suffers a second stroke and passes. Both Sanjay and Neetham died intestate in New Jersey.
Gupta comes to my office and is interested in liquidating her parent’s assets.As part of the process we brought in a probate attorney for purposes of estate administration. After obtaining all of the necessary information pertaining to her parent’s assets and liabilities, we discussed the chronology of events since her parent’s arrival in the United States. We reviewed the immigration process including the initial meeting with the attorney, the documents provided to the attorney and other relevant information. To our dismay, we learned that the immigration attorney failed to make any inquiry concerning the value of Sanjay and Neetham’s assets in India. We were also able to determine through a telephone conference with the attorney and review of intake documentation the absence of any inventory of the Patel’s assets and liabilities in India.
Based upon the information furnished by Gupta, we informed her that we would have to include all of her mother’s assets, including those in India for purpose of calculating the U.S. estate tax.
We were able to secure bank confirmations and statements on all bank and brokerage accounts in the United States and India and also able to obtain appraisals on the mixed use property in India and the home in Monmouth Junction, New Jersey. At the conclusion of my review, I determined that Neetham’s estate was subject to estate tax on the value of the estate’s worldwide assets estimated at $13.5 million on the date of death. We also informed Gupta that U.S. and India do not have an Estate and Gift Tax Treaty. After allowance for $350,000 in expenses and the unified tax credit of $2,117,800, we calculated the total estate tax due in the amount of $3,142,000, exclusive of interest. India does not impose an inheritance or estate tax, but imposes an income tax on any income derived from those assets, a critical consideration ignored by the immigration attorney.
In addition to the estate tax, we reviewed Sanjay and Neetham’s Federal and New Jersey State tax returns for 2011-2014 which were prepared by Liberty Tax Service. During our review of the tax returns, we discovered that FinCen Form 114 for 2011-2014 was never filed nor was any income from these accounts ever recognized for federal income tax purposes. We also discovered the income from the mixed use property in India was never reported on Sanjay and Neetham’s 2011-2014 federal income tax returns, nor was Form 8938 ever filed for the tax years 2011-2012. Gupta was able to retrieve the tax organizers for the tax years 2011-2014. We reviewed the organizers, but none of the questions were answered.We have not included an analysis of potential penalties and the assessment of additional income tax, interest and penalties for purposes of this discussion.
The take away here is that immigration lawyers should confer with a tax attorney who is familiar with the estate and gift tax rules as a part of the intake and review process. Moreover, it is absolutely imperative to inventory the client’s assets and liabilities and determine all income and expenses. The impact of U.S. estate tax should have been considered and discussed prior to advising the clients to pursue lawful permanent resident status. Failure to conduct such an inquiry constitutes a gross departure from the standard of care owed to the client.
While an immigration attorney may not have the knowledge or experience in the area of estate and gift tax, the attorney should, nevertheless, be able to at least spot potential estate and gift tax issues. Where such issues exist it is always advisable to consult with a tax attorney to discuss the best option for the clients.