Expatriate Estate Planning
Expatriation from the United States
Expatriation from the United States entails important income tax as well as non-tax consequences.
Income Tax Consequences
A covered expatriate is deemed to have sold his or her property at fair market value on the day before expatriating. A covered expatriate incurs a 30 percent withholding tax on any distribution received from a U.S.-based deferred compensation (retirement) plan. A covered expatriate is deemed to receive distribution of non-U.S.-based deferred compensation plans on the day before expatriating. Some distributions from a non-U.S.-based deferred compensation plan are not a taxable event for U.S. income tax purposes.
An expatriate, whether or not covered, is subject to U.S. income tax on U.S.-sourced gross income.
Who is a covered expatriate? An “expatriate” is—
- A citizen of the U.S. who relinquishes citizenship; or
- A long-term resident of the U.S. who ceases to be a lawful permanent resident of the U.S.
A “long-term resident” is any individual (other than a citizen of the United States) who is a lawful permanent resident of the United States in at least 8 of the last 15 taxable years preceding abandonment of the individual’s lawful permanent resident status. For this purpose an individual shall not be treated as a lawful permanent resident for any taxable year if such individual is treated as a resident of a foreign country for that year under the provisions of a tax treaty between the United States and the foreign country, and such individual does not waive the benefits of such treaty.
A “covered expatriate” is an expatriate who meets any one of three tests:
- The individual’s average annual U.S. income tax incurred for the five years preceding loss of citizenship or lawful permanent resident status exceeds a minimum amount. The IRS raises the minimum amount annually for inflation. For 2024 expatriations the minimum amount was $201,000.
- The individual’s net worth exceeds $2,000,000.
- The individual fails to certify under penalty of perjury that he or she has complied with the U.S. Internal Revenue Code for the last five years preceding loss of the individual’s citizenship or lawful permanent resident status. This is done on Form 8854, Initial and Annual Expatriation Statement.
Estate and Gift Tax Consequences
An expatriate needs local estate planning counsel in his or her country of residence.
There can be significant U.S. estate consequences for a noncitizen of the U.S. who does not reside in the U.S. but who owns property situated in the U.S. An individual resides in the U.S. for this purpose if he or she is domiciled in the U.S.
The gross estate wherever located of a citizen or resident of the U.S. is subject to U.S. estate tax. There is an unlimited deduction from the taxable estate for bequests to spouse of the decedent who is a U.S. citizen.
A basic exclusion (“unified credit”) is available from the gross estate of a decedent who was a citizen or resident of the U.S. In 2024 the basic exclusion amount was $13,610,000.
The estate of a noncitizen, nonresident of the U.S. is subject to U.S. estate tax, but only to the extent of the decedent’s gross estate which is situated in the U.S. There is no marital deduction for property passing to a spouse who is not a citizen of the U.S. The basic exclusion amount of a noncitizen of the U.S. who did not reside in the U.S. at the time of his death is limited to $60,000. These results may vary by treaty. See, for example, the Convention Between the United States of America And the Federal Republic of Germany For the Avoidance of Double Taxation With Respect to Taxes on Estates, Inheritances, and Gifts (1980), Article 10, Paragraph 5, providing that in determining the estate tax imposed by the United States, the estate of a decedent (other than a citizen of the United States) who was domiciled in Germany at the time of his death shall be allowed a unified credit equal to the greater of:
a) The amount that bears the same ratio to the credit allowed to the estate of a United States citizen of under the laws of the United States as the value of the part of the decedent’s gross estate that at the time of the decedent’s death is situated in the United States bears to the value of the decedent’s entire gross estate wherever situated; or
b) The unified credit allowed to the estate of a noncitizen, nonresident of the United States of under the law of the United States of America. The amount of any unified credit otherwise allowable shall be reduced by the amount of any credit previously allowed with respect to any gift made
The U.S. has estate and gift tax treaties in effect with the following countries:
- Austria
- Australia
- Denmark
- Germany
- Greece
- Ireland
- Italy
- Japan
- Netherlands
- South Africa
- Sweden
- Switzerland
- Ukraine
- United Kingdom
Non-Tax Consequences
Expatriation also involves non-tax consequences, such as loss of an individual’s protection from the U.S. government.
Summary
The decision to expatriate from the United States entails important tax as well as non-tax considerations. We review these with a client before proceeding with expatriation of that client.
- Austria
- Australia
- Denmark
- Germany
- Greece
- Ireland
- Italy
- Japan
- Netherlands
- South Africa
- Sweden
- Switzerland
- Ukraine
- United Kingdom
Expatriation From the United States
Expatriation from the United States entails important tax as well as non-tax considerations.
Expatriation from the United States entails important income tax as well as non-tax consequences.
Income Tax Consequences
A covered expatriate is deemed to have sold his or her property at fair market value on the day before expatriating. A covered expatriate incurs a 30 percent withholding tax on any distribution received from a U.S.-based deferred compensation (retirement) plan. A covered expatriate is deemed to receive distribution of non-U.S.-based deferred compensation plans on the day before expatriating. Some distributions from a non-U.S.-based deferred compensation plan are not a taxable event for U.S. income tax purposes.
An expatriate, whether or not covered, is subject to U.S. income tax on U.S.-sourced gross income.
Who is a covered expatriate? An “expatriate” is—
- A citizen of the U.S. who relinquishes citizenship; or
- A long-term resident of the U.S. who ceases to be a lawful permanent resident of the U.S.
A “long-term resident” is any individual (other than a citizen of the United States) who is a lawful permanent resident of the United States in at least 8 of the last 15 taxable years preceding abandonment of the individual’s lawful permanent resident status. For this purpose an individual shall not be treated as a lawful permanent resident for any taxable year if such individual is treated as a resident of a foreign country for that year under the provisions of a tax treaty between the United States and the foreign country, and such individual does not waive the benefits of such treaty.
A “covered expatriate” is an expatriate who meets any one of three tests:
- The individual’s average annual U.S. income tax incurred for the five years preceding loss of citizenship or lawful permanent resident status exceeds a minimum amount. The IRS raises the minimum amount annually for inflation. For 2024 expatriations the minimum amount was $201,000.
- The individual’s net worth exceeds $2,000,000.
- The individual fails to certify under penalty of perjury that he or she has complied with the U.S. Internal Revenue Code for the last five years preceding loss of the individual’s citizenship or lawful permanent resident status. This is done on Form 8854, Initial and Annual Expatriation Statement.
Estate and Gift Tax Consequences
An expatriate needs local estate planning counsel in his or her country of residence.
There can be significant U.S. estate consequences for a noncitizen of the U.S. who does not reside in the U.S. but who owns property situated in the U.S. An individual resides in the U.S. for this purpose if he or she is domiciled in the U.S.
The gross estate wherever located of a citizen or resident of the U.S. is subject to U.S. estate tax. There is an unlimited deduction from the taxable estate for bequests to spouse of the decedent who is a U.S. citizen.
A basic exclusion (“unified credit”) is available from the gross estate of a decedent who was a citizen or resident of the U.S. In 2024 the basic exclusion amount was $13,610,000.
The estate of a noncitizen, nonresident of the U.S. is subject to U.S. estate tax, but only to the extent of the decedent’s gross estate which is situated in the U.S. There is no marital deduction for property passing to a spouse who is not a citizen of the U.S. The basic exclusion amount of a noncitizen of the U.S. who did not reside in the U.S. at the time of his death is limited to $60,000. These results may vary by treaty. See, for example, the Convention Between the United States of America And the Federal Republic of Germany For the Avoidance of Double Taxation With Respect to Taxes on Estates, Inheritances, and Gifts (1980), Article 10, Paragraph 5, providing that in determining the estate tax imposed by the United States, the estate of a decedent (other than a citizen of the United States) who was domiciled in Germany at the time of his death shall be allowed a unified credit equal to the greater of:
a) The amount that bears the same ratio to the credit allowed to the estate of a United States citizen of under the laws of the United States as the value of the part of the decedent’s gross estate that at the time of the decedent’s death is situated in the United States bears to the value of the decedent’s entire gross estate wherever situated; or
b) The unified credit allowed to the estate of a noncitizen, nonresident of the United States of under the law of the United States of America. The amount of any unified credit otherwise allowable shall be reduced by the amount of any credit previously allowed with respect to any gift made
The U.S. has estate and gift tax treaties in effect with the following countries:
- Austria
- Australia
- Denmark
- Germany
- Greece
- Ireland
- Italy
- Japan
- Netherlands
- South Africa
- Sweden
- Switzerland
- Ukraine
- United Kingdom
Non-tax Consequences
Expatriation also involves non-tax consequences, such as loss of an individual’s protection from the U.S. government.
Summary
The decision to expatriate from the United States entails important tax as well as non-tax considerations. We review these with a client before proceeding with expatriation of that client.
L. Orsel, Unsplash