Under Code Section 2035(b), if a U.S. person makes a gift and pays gift tax within 3 years of his or her death, the amount of the gift tax is included in his or her gross estate for federal estate tax computation purposes. In an interesting ruling, the IRS has indicated that such inclusion will not apply if the decedent is a nonresident alien of the U.S. for transfer tax purposes.
Code Section 2104(b) generally applies Code Sections 2035 through 2038 to the estates of nonresidents. However, Code Section 2104(b) by its language only applies to “property of which the decedent has made a transfer.” The IRS is interpreting this language to require a “gratuitous transfer,” and further believes that the payment of gift tax is not such a gratuitous transfer. Thus, Code Section 2035(b) will not apply.
Nonresidents have various transfer tax planning opportunities that are not available to U.S. citizens and residents. Add this to the list!