Presenting a live 90-minute webinar with interactive Q&A
Probate Strategies When
Non-Resident/Non-Citizen Decedents
Own U.S. Assets: Legal, Tax and Practical Issues
TUESDAY, JUNE 30, 2015
1pm Eastern
|
12pm Central | 11am Mountain
|
10am Pacific
Today’s faculty features:
Dean C. Berry, Partner, Cadwalader Wickersham & Taft, New York
Jinsoo J. Ro, Norton Rose Fulbright, New York
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Topics
•
Probate and Nonprobate Procedures for Non-US Decedents
•
US Federal Estate Taxation of US Situs Assets
•
US Federal Estate Tax Collection Procedures
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SECTION 1 PROBATE AND NONPROBATE
PROCEDURES FOR NON-US DECEDENTS
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Example #1
•
Mr. X died in 2015 as a Dutch citizen and domiciliary
•
Surviving heirs are a wife and two adult children, all Dutch
and non-US
•
Dutch Will leaves entire estate to wife and appoints her
executor
•
At death Mr. X owned a New York brokerage account with a
$1 million US stock portfolio
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Alternative #1  Ancillary Probate of
Dutch Will in New York
•
Requirement of original probate in Netherlands (§ 1602 of
NY Surrogate’s Court Procedure Act (SCPA))
•
Application made by Dutch executor or other person
charged with administering estate (SCPA § 1604)
•
Need for NY resident as designated or co-ancillary executor
(SCPA §§ 707(1)(c) and 1608(4))
•
Need for authentication of Dutch legal documents (SCPA
§ 1614)
•
After payment of claims, balance of NY probate estate is
payable to Dutch executor to be dealt with according to
Dutch inheritance law (SCPA § 1610)
Cadwalader, Wickersham & Taft LLP
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Alternative #2  Original Probate of
Dutch Will in New York
•
Possible (SCPA § 1605) but rare
•
NY allows original probate in multiple jurisdictions in limited
circumstances (SCPA § 1605(2))
Cadwalader, Wickersham & Taft LLP
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Alternative #3  Original Probate of
American Will
•
Mr. X executes a NY Will for US assets and a Dutch Will for
all other assets
•
NY courts have discretion to accept a nonresident’s Will for
original probate where there are probate assets in NY and
will usually do so (SCPA § 1605(1))
•
Application made by executor named in US Will
•
If designated executor is a nondomiciliary alien of NY, will
need a NY resident as co-executor (SCPA § 707(1)(c))
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Alternative #3  Original Probate of
American Will (cont’d)
•
Use of American Will raises choice of law issues regarding,
among other issues, the applicable law governing
testamentary dispositions
•
In general, the disposition of:
•
–
Real property is determined by law of land’s situs (§
3-5.1(b)(1) of the NY Estates, Powers and Trusts Law
(EPTL))
–
Personal property is generally determined by law of
decedent’s domicile at death (EPTL § 3-5.1(b)(2))
However, if Mr. X’s American Will provides that NY law shall
apply to the disposition of his estate, then NY courts will
apply NY law to assets situated in New York (EPTL § 3-5.1(h))
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Matter of Renard, 56 N.Y.2d 973 (1982)
•
French citizen and resident, who had previously been a NY
resident, executed a Will in Paris leaving New York assets to
a friend and charity, and requesting that the Will be
probated in NY and that NY law apply
•
Decedent’s son, French/US citizen and California resident,
objected and claimed 50% of NY estate as his entitlement
under French law of forced heirship
•
NYS Court of Appeals upheld decisions of lower courts that
rejected son’s claim on grounds that EPTL § 3-5.1(h) allows
a nonresident decedent to elect NY law to govern the
disposition of NY assets
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Limits on Application of New York Law
to Nonresident Decedents
•
Surviving spouse’s right of election (see, e.g., Matter of
Clark, 21 N.Y.2d 478 (1978))
•
Surviving spouse’s interest in community property
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Alternatives to Probate
•
•
Nonprobate transfers
–
Gifts
–
Joint ownership
–
Beneficiary designations
–
Pay on death accounts
Corporation or LLC for US assets
–
•
LLC membership is an intangible personal property interest;
disposition is governed by law of decedent’s domicile at death
Revocable trust for US assets
–
New York allows a nonresident settlor to elect that a trust be governed
by New York law
–
NY law will then apply to (i) real and personal property situated in NY
and (ii) personal property wherever located if trust has a NY trustee
(EPTL § 7-1.10)
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Marital Property Issues
•
Who is a surviving “spouse?”
•
Community property issues
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SECTION 2 US FEDERAL ESTATE TAXATION OF US
SITUS ASSETS
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Basic Rules Applicable to US and
Non-US Persons
•
The application of US transfer tax rules generally depends
on whether the transferor is a US citizen or US resident on
the one hand (“US Persons”), or a non-US citizen who is
also a non-US resident on the other hand (“Non-US
Persons”)
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US Transfer Tax Definition of Resident
•
A resident for transfer tax purposes is one who is domiciled
in the United States
–
•
Domicile is acquired by living in a country, even for a
brief period of time, with no definite present intention of
moving at a later time (Treas. Reg. § 20.0-1(b)(1) (estate
tax) and § 25.2501-1(b) (gift tax))
A resident individual for all other purposes is determined
under IRC § 7701(b)
–
Substantial Presence Test
–
Green Card Test
–
First Year Election
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US Transfer Tax Rules Applicable to
US Persons
•
US Persons are generally subject to US Federal estate, gift
and GST tax on taxable transfers of property, wherever
located, at a 40% rate
•
US Persons are generally entitled to an exemption from
each transfer tax. The gift and estate tax exemptions are
unified. In 2015, the maximum exemption for each
transferor is $5,430,000 for Federal estate, gift and GST tax
purposes
•
All US Persons can:
–
make annual exclusion gifts ($14,000 in 2015)
–
elect to use portability and
–
split gifts
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US Transfer Tax Rules Applicable to
Non-US Persons
Estate Tax
•
Non-US Persons are subject to US estate tax on assets situated in the US
•
Non-US Persons have a $13,000 credit (which equates to a $60,000 exemption)
from US estate tax; however US estate tax treaties may provide a greater
exemption
Gift Tax
•
Non-US Persons are subject to US gift tax on gifts of real and tangible
property situated in the United States
–
Unless the donor expatriated, intangible property given by a non-US
resident is not subject to the gift tax
–
The IRS takes the position that Treasury bills located in the United
States are tangible assets (PLR 8138103)
–
Annual exclusion for gifts ($14,000 in 2015) is allowed, but gift-splitting
is not allowed
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US Transfer Tax Rules Applicable to
Non-US Persons (cont’d)
Generation Skipping Transfer Tax
•
Determined under estate and gift tax principles
•
Although the Regulations provide that Non-US Persons are
entitled to an exemption of $1 million, the GST exemption
for nonresidents is the same as for residents and citizens
under IRC § 2631
Cadwalader, Wickersham & Taft LLP
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Special US Estate and Gift Tax Rules
Applicable to Non-US Citizen Spouses
Estate Tax
•
The estate of a decedent (regardless of whether a resident or nonresident) is allowed an unlimited marital deduction for assets
passing to a US citizen spouse
•
No such deduction is allowed for transfers to a non-US citizen
spouse unless the assets are transferred to a qualified domestic trust
(“QDOT”)
Gift Tax
•
Gifts to US citizen spouses are entitled to an unlimited marital
deduction
•
No such deduction is allowed for gifts to a non-U.S. citizen spouse
•
However, larger annual exclusion gifts can be made to non-citizen
spouses than to non-spouses ($147,000 in 2015)
Cadwalader, Wickersham & Taft LLP
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Filing Considerations
Form 706-NA
•
$60,000 threshold (US assets)
•
Usual deadlines (9 months, with 6 month extension)
•
Alternate valuation
Federal Transfer Certificates
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Situs Rules
Section 2104: Property situated in the US
•
Real Property
•
Tangible Personal Property
•
Intangible Property
–
Corporations
–
Partnerships?
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US Bilateral Estate and Gift Tax
Treaties
•
•
Estate and gift tax treaties are designed to avoid double
taxation of transfers:
–
when an individual is a citizen or resident of one
country but owns, or is transferring, property located in
another country
–
when an individual is resident of multiple countries
under local laws
A treaty generally will permit each country to tax property
located within its borders, and also may allow an increased
credit or exemption to a Non-US Person
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US Bilateral Estate and Gift Tax
Treaties (cont’d)
•
Australia*
•
Ireland
•
Austria
•
Italy
•
Canada*
•
Japan
•
Denmark
•
Netherlands
•
Finland
•
Norway
•
France
•
South Africa
•
Germany
•
Switzerland
•
Greece
•
United Kingdom
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US Bilateral Estate and Gift Tax
Treaties (cont’d)
Special note: Some countries (two notable examples being
Canada and Australia) do not have an estate or gift tax, but do
have a deemed capital gains tax (“CGT”) on death. Because
CGT is not an estate tax, a bilateral estate tax treaty may not
provide relief from double taxation
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SECTION 3 US FEDERAL ESTATE TAX COLLECTION
PROCEDURES
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Example #2
•
Mr. Y, a Brazilian decedent, died owning a New York
brokerage account with a $1 million US stock portfolio
•
Mr. Y’s sole heir, Child A, asks the broker to pay over the
account to him
•
Broker refuses unless:
–
An executor for Mr. Y’s estate is appointed by a US court;
or
–
Child A provides broker with Federal Transfer Certificates
Q: Why did the broker refuse to pay over the assets to
Child A?
A: Concern that broker will be personally liable if Child A
fails to pay the estate tax
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Responsibility for Paying US Estate Tax
– Executors and “Statutory Executors”
•
The person primarily responsible for paying the estate tax is
the “executor” (IRC § 2002)
•
For this purpose, “executor” means “the executor or
administrator of the decedent, or, if there is no executor or
administrator appointed, qualified and acting within the
United States, then any person in actual or constructive
possession of any property of the decedent” (IRC § 2203)
•
If no executor is appointed by a US court, then “any person
in actual or constructive possession of any property of the
decedent” is responsible for paying the decedent’s estate
tax. Such a person is a “statutory executor”
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Example #2  Child A’s Options
1. File for ancillary probate or administration in a New York
court
–
Broker will then pay assets to US ancillary executor or
administrator
2. File for original probate of Mr. Y’s American Will in a New
York court
–
Broker will then pay assets to US executor
3. Do not file in New York court, but obtain Federal Transfer
Certificates
–
Broker will pay assets to Child A upon receipt of
Transfer Certificates
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Personal Liability for Payment of US
Estate Tax
•
The executor is primarily responsible for payment of US
estate tax
•
If the executor fails to pay, the IRS is authorized to assess
and collect estate tax liabilities from:
–
Persons who acquire property from the taxpayer
(“transferees”)
–
Any person who exercises control over the disposition
of decedent’s property (“fiduciaries”)
–
Statutory executors, but only if there is no US-court
appointed executor
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Extent of Personal Liability
•
Executors and fiduciaries are potentially personally liable up
to the amount of payments (including distributions to
beneficiaries) improperly made in preference over the claim
of the US Government for taxes
•
Transferees are potentially personally liable up to the value
of the property received. For probate transferees, this
liability is usually imposed by US state law (See, e.g., EPTL
§ 12-1.1)
•
A person who is personally liable for tax may also be liable
for payment of interest on the tax and penalties (IRC
§§ 6601(e)(1) and 6665(a)(2))
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Personal Liability of Executors
•
Treas. Reg. § 20.2002-1 provides that personal liability of an
executor is described in Section 3467 of the Revised
Statutes (31 U.S.C. 192). Current version of Section 3467 is
31 U.S.C. Section 3713(b) (“Section 3713(b)”)
•
Section 3713(b), enacted in its current form in 1982,
provides:
“A representative of a person or an estate (except a trustee
acting under title 11 [relating to bankruptcy estates]) paying
any part of a debt of the person or estate before paying a
claim of the Government is liable to the extent of the
payment for unpaid claims of the Government”
•
Treas. Reg. § 20.2002-1 defines “debt” as including a
beneficiary’s distributive share of an estate
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Personal Liability of Executors (cont’d)
Allen v. Commissioner, TC Memo 1999-385
•
US Tax Court determined that IRS must establish three
elements before executor will become personally liable for
unpaid claims:
–
The executor distributed assets of the estate;
–
The distribution rendered the estate insolvent; and
–
The distribution occurred after the executor had notice of
the unpaid claims of the US
Revenue Ruling 66-43, 1966-1 C.B. 291
•
IRS held that an executor is not personally liable unless he has
either personal knowledge of the debt or “has such knowledge
as would put a reasonably prudent man on inquiry”
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Personal Liability of Transferees
•
A “transferee” is a person with a beneficial interest in the
property transferred, and includes a donee, heir, legatee,
devisee or distributee
•
Personal liability of a transferee is determined under state
law (see, e.g., EPTL § 12-1.1)
•
For estate tax, trustees and certain other persons in
possession or control of a decedent’s property that is
includible in the gross estate under IRC §§ 2034-2042 are
also potentially personally liable as transferees (IRC
§ 6324(a)(2))
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Personal Liability of Fiduciaries
•
Section 3713(b) imposes personal liability on fiduciaries
•
“Fiduciary” means “a guardian, trustee, executor,
administrator, receiver, conservator, or any person acting in
any fiduciary capacity for any person” (IRC § 7701(a)(6))
•
An agent is not a fiduciary (Treas. Reg. § 301.7701-7)
•
In addition, certain trustees who hold on the date of the
decedent’s death property that is included in the decedent’s
gross estate are also personally liable for the estate tax
(IRC § 6324(a)(2))
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Personal Liability of Statutory
Executors  or Not
•
A “statutory executor” includes “the decedent’s agents and
representatives; safe-deposit companies, warehouse
companies, and other custodians of property in this
country; brokers holding, as collateral, securities belonging
to the decedent; and debtors of the decedent in this
country” (Treas. Reg. § 20.2203-1)
•
In our example, the broker refused to pay the NY account to
Child A because the broker was concerned that it would be
personally liable for payment of the estate tax if Child A
failed to pay the tax
•
But is it correct that the broker may become
personally liable for the estate tax?
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Why Statutory Executors Are
Concerned About Personal Liability
•
Treas. Reg. § 20.2002-1 states that “other persons” (which
may include statutory executors) may be personally liable
for estate tax under the predecessor of Section 3713(b)
•
IRC § 6901(a)(1)(B) imposes assessment and collection
procedures to “the liability of a fiduciary” under
Section 3713(b)
•
Treas. Reg. § 20.6325-1(a) states that statutory executors
“can insure avoidance of liability for taxes and penalties
only by demanding and receiving transfer certificates before
transfer of property of nonresident decedents”
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Why Statutory Executors Should Not
Be Concerned with Personal Liability
•
The only statutory basis for personal liability of statutory executors is
Section 3713(b)
•
A statutory executor is not a “representative” of an estate within the
meaning of Section 3713(b). See, e.g., Occidental Life Ins. Co. of California
v. Comm’r, 50 T.C. 726 (1968) (holding that a statutory executor is not within
the class of persons to which the predecessor of Section 3713(b) applied)
•
A statutory executor is an agent and not a “fiduciary” within the meaning of
Treas. Reg. §§ 301.7701-6 and 301.7701-7
•
In CCA 200830001, an IRS Office of Chief Counsel Memorandum, the IRS
acknowledged that a statutory executor may not be personally liable for
unpaid estate tax under Section 3713(b). However, the IRS did not explicitly
conclude that there is no personal liability
•
Despite these arguments, as a practical matter US banks, brokers and other
statutory executors do not want to assume the risk of personal liability and
will release assets only to a US executor or upon the receipt of Federal
Transfer Certificates
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Federal Transfer Certificates
•
A transfer certificate is a release of lien with respect to the assets
described therein
•
A transfer certificate permits the person holding the decedent’s
property to transfer the property to a foreign executor or a beneficiary
without further liability to the transferor
•
Transfer certificates are issued by the IRS with respect to specific
property includible in the decedent’s gross estate
•
Transfer certificates are obtained by filing an estate tax return with the
IRS (usually Form 706-NA). The return is usually filed by the foreign
executor or the heirs, but can also be filed by the US statutory
executor
•
The IRS will issue transfer certificates after it has reviewed the return
and determined that the estate tax has been paid. Accordingly, it can
take many months before an estate tax return is prepared, filed and
reviewed. In the meantime, the decedent’s assets may be frozen
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Affidavit in Lieu of Transfer
Certificates
•
Transfer certificates are not required if the date of death
value of all the decedent’s US situs assets did not exceed
$60,000 (taking into account taxable gifts, if any) (Treas.
Reg. § 20.6325-1(b)(1)(i))
•
A statutory executor will not be liable for transferring a
nonresident decedent’s property if it receives an affidavit
from the foreign executor or other responsible person in
possession of the facts that the value of decedent’s US
assets did not exceed $60,000 (Treas. Reg. § 20.6325-1(b)(3))
•
Some but not all US financial institutions will accept such
affidavits
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In Example #2, What If:
•
Mr. Y’s only US asset was a New York bank account with
$50,000?
–
•
Bank might accept an affidavit from Child A that Mr. Y
was not a US citizen or resident and that the value of all
Mr. Y’s US assets did not exceed $60,000
Mr. Y was a resident of the UK at his death?
–
Under the US-UK estate tax treaty, the brokerage
account would be exempt from US estate tax
–
However, the broker will not want to make the
determination that Mr. Y qualified as a UK resident
under the treaty. This will leave Child A with the same
options as before
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Lessons
•
In practice, foreign executors and beneficiaries are usually
unpleasantly surprised by the need to obtain Federal
Transfer Certificates
•
They are even more displeased if the US assets are frozen
until transfer certificates are obtained
•
In planning, consider structuring a non-US client’s US
assets in a manner to avoid the need to obtain transfer
certificates after the client’s death (e.g., American Will,
nonprobate transfer, LLC/corporation, revocable trust)
•
Alternatively, consider whether it would be more
expedient/less expensive to apply for the appointment of a
US ancillary executor or administrator
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Cadwalader, Wickersham & Taft LLP
www.cadwalader.com
Dean C. Berry
Jinsoo J. Ro
Cadwalader, Wickersham & Taft LLP
One World Financial Center
200 Liberty Street
New York, NY 10281
dean.berry@cwt.com
212 504 6944
Norton Rose Fulbright US LLP
666 Fifth Avenue
New York, NY 10103
jinsoo.ro@nortonrosefulbright.com
212 318 3199