In today's world of
high-speed technology and rapid intercontinental travel, there are many people
who have cross-border tax situations; American citizens owning assets
outside the United States and nonresident aliens owning assets in the
United States. Unfortunately they occasionally die, and if one of these people
happens to be your client, it is imperative that you take advantage of the
numerous estate tax treaties between the United States and some 20 other
countries to minimize the federal estate tax (FET).
Unfortunately, as I
learned in my 32 years at the IRS, many attorneys and accountants are either
unaware of the treaties or afraid to try to work with them resulting in
substantially higher taxes paid by the decedents' estates. It is not the
IRS agents job, when examining a tax return, to apprise the estate that they could
have substantially reduced the tax liability through the utilization of a
treaty. The IRS criteria is substantially
correct so if the FET is correctly
calculated under the Internal Revenue Code, the agent is not
required divulge the ability of the estate to reduce its tax via
utilization of a tax convention.
The situation can arise
within two contexts: the American citizen who owns property in and is
taxed by a foreign country or a foreign citizen who owns assets in the United
States which are subject to FET. In the former case it is critical to see what
the foreign country taxed, the amount of the tax, and the calculation of the
credit under the tax convention.
For example an
American citizen decedent with property in various countries, in addition
to determining the FET, needs to calculate the section 2014 credit available
to reduce that tax. The first step is to obtaining tax returns from the various foreign jurisdictions and obtaining receipts or evidence of payments
to each respective countries tax entity.
You then need to review the
treaties, determine which of the decedent's assets of fell within the
protection of the treaties, and calculate the tax. The calculation can be
somewhat difficult because the IRS requires two levels of calculation, the
former based on the amount of tax paid in the foreign country and the latter a
function of the amount of US tax allocable to the assets located in the foreign
country and taxed by the foreign country.
Therefore not every euro, franc or other currency paid will be matched with a similar credit in the United States. The
purpose of the treaties is to avoid double taxation but the treaties cannot
always match assets and credits identically.
The nonresident alien owning property in the United States problem is, to some extent, even more complex. Most of the estate tax treaties are based on domicile in the foreign country, not citizenship. For instance, we had a client who was a citizen of the UK but domiciled in the Isle of Man. Because of the domiciliary, we were unable to use the UK tax convention to assist the estate.
Therefore not every euro, franc or other currency paid will be matched with a similar credit in the United States. The
purpose of the treaties is to avoid double taxation but the treaties cannot
always match assets and credits identically. The nonresident alien owning property in the United States problem is, to some extent, even more complex. Most of the estate tax treaties are based on domicile in the foreign country, not citizenship. For instance, we had a client who was a citizen of the UK but domiciled in the Isle of Man. Because of the domiciliary, we were unable to use the UK tax convention to assist the estate.
The results can be
relatively astounding in terms of dollars. I was recently retained by a local
firm to review the 706NA (nonresident alien estate tax return) prepared by a
local accountant. He opined that the estate of approximately $200,000 in FET.
When I looked at the return, it was obvious to me that he had no inkling that
there was a tax convention between the US and the country in question. By
applying the treaty, I was able to reduce the tax by $187,000.
The moral of the story
is if you have a decedent who was either a US citizen owning property abroad or
a nonresident alien owning assets in the United States, look to see whether a
treaty can assist you in substantially reducing the tax.
In my 32 years with
the IRS, I never saw a situation where an estate was worse off using the
Internal Revenue Code than using the treaty. If the situation ever arose,
however, use of the treaty is optional so one can always rely on the IRC
as the basis for determining the tax.
Have an Estate Tax Audit Problem?
Estate Tax Audits Require an Experienced Tax Attorney
Contact the Tax Lawyers at
Marini & Associates, P.A.
for a FREE Tax Consultation Contact US at
or Toll Free at 888-8TaxAid (
888 882-9243).
888 882-9243).
Mr. Blumenfeld concentrates his practice in the areas of International Tax and Estate Planning, Probate Law, and Representation of Resident and Non-Resident Aliens before the IRS.
Prior to joining Marini & Associates, P.A., he spent 32 years as the Senior Attorney with the Internal Revenue Service (IRS), Office of Deputy Commissioner, International.
While with the IRS, he examined approximately 2,000
Estate Tax Returns and litigated various international and tax issues
associated with these returns.As a result of his experience, he has extensive knowledge of the issues
associated with and the preparation of U.S. Estate Tax Returns for
Resident and Non-Resident Aliens, Gift Tax Returns, Form 706QDT and
Qualified Domestic Trusts.
