Friday, June 20, 2014
It is becoming increasingly common for families to own assets internationally, for executives to have international assignments, and for families to have members live abroad. These “cross-border circumstances” give rise to many U.S. income, gift, estate, and generation-skipping transfer tax consequences, especially when trusts are involved.
Because U.S. citizens are subject to U.S. income tax on their worldwide income, the broad tax umbrella also extends to U.S. individuals, trusts and estates. Residence is not determinative of taxation, thus, even if a U.S. citizen has departed the United States they are subject to tax on their worldwide income. Additionally, persons who are considered “residents” of the United States are subject to U.S. income taxation on their worldwide income even if they are not U.S. citizens. This includes U.S. resident trusts and estates.
For non-residents who are not U.S. citizens it is the site (“situs”) of their property that determines whether they will be subject to U.S> transfer taxes. For both gift and estate tax purposes, real property and tangible personal property physically located in the United States has a U.S. situs. For gift tax purposes, intangible personal property does not have a U.S. situs, whatever its source or location. However, for estate tax purposes, intangible personal property has a U.S. situs if it is derived from a U.S. person or entity.
Yet, for policy reasons, many types of property are treated under the Code as not having a U.S. situs despite being located in the United States. Examples include deposits with U.S. banks and savings and loans, life insurance proceeds, and works of art on loan for exhibition.
This is an ever-changing area of the law that requires meticulous attention to continuing developments. If a foreign estate or trust has an interest in a foreign partnership or a foreign corporation, it will be necessary to separately consider the applicability of any reporting requirements with respect to those interests.
See Suzanne L. Shier, Cross-Border Trusts, Northern Trust, May 2014.