U.S. ESTATE PLANNING FOR EXPATRIATES

Code §2801 imposes U.S. transfer taxes on transfers by former U.S. persons who have expatriated if the transfer is to a U.S. person. This tax is imposed on the U.S. recipient. A recent article by Joseph Toce, Jr. and Joseph Kluemper points out several planning considerations for such expatriates if they have U.S. persons who will be recipients of gifts or testamentary transfers. These include:

a. Making Lifetime Gifts of Property to U.S. Persons that are Subject to U.S. Gift Tax Instead of Testamentary Transfers. Under normal U.S. gift tax rules, gift taxes are tax-exclusive if the donor survives the gift by three years. That is, the taxes themselves are not considered by the gift – there is no tax on the tax. However, §2801 taxes are tax inclusive – thus, they are taxed at higher effective rates. So, similar to the same considerations that apply to U.S. donors, a lifetime gift bears less taxes than a testamentary gift. Since this does not work if the gift is taxed under §2801, the gift must be of property that is otherwise subject to U.S. gift taxes aside from the expatriate status of the donor. This is because §2801 will not apply to a gift of a nonresident that is otherwise subject to U.S. gift taxes. Thus, the donor should use property that is U.S. situs property for gift tax purposes, such as U.S. real property, to make the gift.

b. Make Use of Double Annual Exclusion Gifts. It is likely that if a donor makes an annual exclusion gift of U.S. situs property and of non-U.S. situs, each gift can benefit from a $14,000 annual exclusion. One exclusion is the regular exclusion that applies to U.S. situs assets under the regular gift tax rules, and the second is the annual exclusion that is granted to the donee under §2801.

c. Consider Making Generation Skipping Transfers of Non-U.S. Situs Assets. Transfers of non-U.S. situs assets will still be subject to tax under §2801. However, there is no GST tax under §2801 so when appropriate, a generation skip can be included in the transfer to avoid future transfer taxes.

d. Carefully Allocate U.S. Situs Property and Non-U.S. Situs Property Between U.S. and non-U.S. Recipients. The goal here is to transfer the U.S. situs property to the U.S. people, since it will be taxed under the normal nonresident transfer rules or §2801 – either way. This leaves non-U.S. situs property to go to nonresidents, free of U.S. transfer taxes – if U.S. situs property is instead transferred to them, then U.S. transfer taxes would apply.

Estate Planning for Expatriates Under Chapter 15, by  Joseph Toce, Jr. and Joseph Kluemper, published in the January 2013 issue of Estate Planning Journal

APPLICABLE FEDERAL RATES–JANUARY 2013

LAST MINUTE GIFTING BY CHECK

Time is running out for 2012 gift giving. End of year gifting by check is always an issue for those trying to use their annual exclusion amounts, but in 2012 the issue also relates to those attempting to make larger gifts to use their unified credit amounts before the scheduled reduction of the unified credit in 2013.

The issue with using checks to make gifts is that until the check clears the bank, the donor can revoke the gift by issuing a stop payment or by removing adequate funds from the bank account. A gift that can be revoked is not complete until revocability ends. Thus, a check written in 2012 that does not clear until 2013 is at risk of being a 2013 gift, not a 2012 gift, since the donor could have stopped payment in 2013 before it cleared.

There is case law on gifts by check, and when they will be treated as complete. The safest course is to deliver the check in 2012, have it deposited by the recipient, and have it clear in 2012.

Failing that, Revenue Ruling 96-56 provides a safe harbor. Under that ruling a gift by check delivered in 2012 will be a gift as of the date the check is deposited or presented for payment if:

(1) the check was paid by the drawee bank when first presented to the drawee bank for payment;

(2) the donor was alive when the check was paid by the drawee bank;

(3) the donor intended to make a gift;

(4) delivery of the check by the donor was unconditional; and

(5) the check was deposited, cashed, or presented in 2012 and within a reasonable time of issuance.

Thus, depositing the check in 2013 will be a problem.

These rules are not the same as for charitable contribution deductions – those rules are more liberal.

LATE GIFT FILING COULD NOT USE UNIFIED CREDIT

In a recent Chief Counsel Advice, a taxpayer made a gift in the prior year, but did not file a gift tax return. The taxpayer later died. On the estate tax return for the taxpayer, the earlier unreported gift was reported.

The IRS concluded that a gift tax was due for the year of the unreported gift. This resulted, even though the taxpayer had available unified credit in the year of the unreported gift to avoid gift tax in that year. The quirk in this case is that the taxpayer used her unused unified credit against gifts made in a later tax year, which tax year was then closed for statute of limitation purposes at the time of the IRS adjustments. Since the IRS could not apply unified credit in the earlier year, and then assess gift taxes in the later years (because the statute of limitations was closed), the only recourse for the IRS was to deny the use of the credit in the earlier year. The theoretical basis for such a special determination was the consistency doctrine, per similar facts and issues addressed in PLR 199930002.

Interestingly, interest on the unreported gift was determined to run from the due date of the return for the unreported gift year, and not from the due dates of later years when gift tax would have been imposed if all the gifts had been reported in order. While one perhaps can justify the loss of the use of the unified credit in the earlier unreported year, it does seem inappropriate to charge interest from that year since in no circumstance would taxes have had to been paid in that year.

Chief Counsel Advice 201249015

DON’T EXAGGERATE YOUR INCOME ON CREDIT APPLICATIONS

Taxpayers may be tempted to exaggerate the amount of money they earn when submitting credit or mortgage applications so as to qualify for loans or increased credit limits. This could come back to haunt them, however, in an income tax audit.

That is what happened to Carol Trescott, a massage therapist. She was audited, and she did not cooperate with the IRS. So the IRS used the amounts she listed as income on a credit application as income on a return they prepared for her (since she did not prepare a return herself for the tax year). Carol objected, claiming this was not a reasonable basis for computing her income. The Tax Court disagreed, and accepted the IRS return amounts.

In most audit circumstances, the taxpayer will have prepared a return, so the IRS will not be preparing one for them. However, even when there is a return, if the auditor notes a material difference in income reported on the return and what was used by the taxpayer on a credit application, the auditor’s suspicions will be aroused. That is never a good thing to have happen on an audit.

Trescott v. Comm., T.C. Memo 2012-321

NEW ITIN REQUIREMENTS

The IRS has issued new guidance regarding the issuance of international taxpayer identification numbers for non-U.S. taxpayers.

THE GOOD NEWS

1. Identification documents in most circumstances will not need to be mailed to the IRS with the Form W-7 application. Taxpayers may instead have them reviewed by a Certifying Acceptance Agent, by the IRS at key Taxpayer Assistance Centers, by certain U.S. Tax Attaches, and other alternative reviewers.

THE BAD NEWS

1. ITINs will now expire after 5 years.

2. The recent requirements for original identity documentation, or copies certified by the issuing agency (instead of accepting notarized copies of documents) are kept in place.

3. Certifying Acceptance Agents will have to take formal forensic training to help them identify legitimate identification documents.

Fact Sheet 2012-11, November 2012, IR 2012-98

FEDERAL TAX OVERPAYMENT AND UNDERPAYMENT INTEREST RATES–1ST QUARTER 2013

SLAT BACKUP

By Charles Rubin and Robert Chaves

There is a substantial amount of gifting activity being undertaken in late 2012 to use the unified credit before it is scheduled to be reduced in 2013. Oftentimes, spouses are creating trusts for each other to use their credit, which trusts are commonly known as spousal limited access trusts, or SLATs.

SLATs are not without tax risk, especially if each spouse creates one for each other (e.g., the application of the reciprocal trust doctrine). While with proper planning such risks can be minimized, the possibility that the assets of a SLAT may be includable in the gross estate of a grantor spouse cannot be entirely eliminated. While many believe that such a grantor should be in no worse position than if he or she had not undertaken the planning, this ignores the loss of the ability of such a grantor spouse to use the marital deduction for such transferred assets (if he or she is the first spouse to die).

Therefore, in preparing SLATs, planners should include a provision that allows for the marital deduction in the event of gross estate inclusion in the estate of the grantor spouse. Further, in the circumstances of powers of appointment being exercised by a beneficiary spouse in a SLAT in favor of the grantor spouse at the death of the beneficiary spouse, similar planning may be indicated.