By Anthony Diosdi
When a U.S. estate and gift tax nonresident domiciliary (“Foreign Individual”) gratuitously transfers U.S. real estate to another individual, he or she should be aware of the various U.S. gift and estate tax consequences associated with such a transfer. In addition, the Foreign Individual should also make his or her U.S. legal advisor aware of his or her ultimate goal when transferring such U.S. real property.
The example which follows comes from our previous experiences and demonstrates a situation in which a Foreign Individual transfers “or gifts” to another individual U.S. real property without intending to make it a gift for U.S. transfer tax purposes. Transfers of real estate are often made by an elderly and/or sick Foreign Individual who was thinking in terms of avoiding potentially costly and time-consuming probate in order to smoothly administer the U.S. property in the event of a death.
Husband (“H”) and wife (“W”), are from Argentina. Both are elderly and in poor health. H and W own a condominium in Miami, Florida as joint tenants with right of survivorship. H and W elect to add their child to the title of their condominium. Shortly after the transfer, W dies.
At the time the child was added to the title of the condominium, the couple from Argentina and the advisor that assisted them with the transfer was not aware of the gift tax consequences of such transfer. Although the transfer may not have been intended to be a gift (i.e., its purpose was to facilitate the administration of the condominium due to H and W’s advanced age and poor health), H and W transferred an interest in real property without obtaining anything in return and thus, for U.S. gift tax purposes, the addition of the couple’s child to title constituted a gift subject to a transfer tax. To make matters worse, at the time of W’s, she may be considered to have owned all or a portion of the condominium and her estate could be subject to U.S. estate tax on the value of her interest in the apartment. The rules to determine the value of her interest in the apartment for a Foreign Individual for U.S. estate tax purposes are quite complex and it is possible that the estate of W may not be able to reduce the interest W had in the condominium by the amount that was previously gifted. To make matters even more complicated, because of the complexities of the gift and estate tax rules, W may not only be subject to gift tax on the amount gifted to her child, but pursuant to the estate tax rules, W’s estate potentially may not obtain a credit for the prior gift tax paid resulting in a potential for double transfer tax. Obviously, had H and W known the resulting gift and estate tax consequences of the transfer to their child, they would never have made the transfer.
Had H and W owned the property by themselves as joint tenants with no gifting of their interest in the apartment, they would not have been subject to the estate tax. Instead, the estate tax could have been deferred if W’s estate obtained the benefits of the unlimited marital deduction. This could have been done by having W’s interest in the condominium passes to H through a qualified domestic (“QDT”). A QDT is a “necessity” to obtain such deduction where the surviving spouse, i.e., H is not a U.S. citizen. This QDT assures the U.S. tax authorities that no U.S. estate tax avoidance will be accomplished.
An alternative for H and W would have been to keep the apartment as it was and for each of them to do a Florida Last Will and Testament that would dispose of the apartment upon the death of the second of them to die. At least the U.S. estate tax could have been deferred until the second death. Alternatively, H and W could have contributed the apartment to a Revocable Inter Vivos Trust that would include H’s and W’s intended beneficiaries subsequent to their or their survivor’s lifetime use thereof. Of course, the facts herein assume a situation where Foreign Individuals own the real estate in their own names. However, as we have explained in prior articles, there are various other alternatives for Foreign Individuals to acquire U.S. real estate, some of which provide “protection” from the U.S. estate tax. As a result, it is quite important that any acquisition, sale or other transfer of U.S. real estate by a Foreign Individual should be done only after obtaining adequate U.S. tax advice.
Anthony Diosdi concentrates his practice on tax controversies and tax planning. Diosdi Ching & Liu, LLP represents clients in federal tax disputes and provides tax advice throughout the United States. Anthony Diosdi may be reached at 415.318.3990 or by email: Anthony Diosdi – adiosdi@sftaxcounsel.com.
This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.