Estate Planning for Non-U.S. (British) citizen

Memorandum

Estate Planning and Taxation of NRA (British) Spouse

Facts: U.S. Taxpayer (U.S. citizen) and his wife, a non-U.S. citizen or resident, own a home in the United Kingdom. In addition, Taxpayer has a large retirement plan with his current employer, which will be rolled over into an IRA upon retirement.

1. Taxpayer’s residence in England: If the United Kingdom is a community property country and Taxpayer’s spouse is considered owning a 50% share under the law, then only 50% of the home’s value will be included in Taxpayer’s estate for estate tax purposes. Likewise, if Taxpayer was married to his English wife at the time and their residence was acquired before July 14, 1988 and is currently held in joint tenancy, then only 50% of the residence will become part of Taxpayer’s estate.

If, however, they hold the property jointly but acquired it after July 14, 1988, then the entire value will be included in Taxpayer’s estate, unless spouse can prove she made contributions toward the purchase and payment of the residence (this is often difficult to prove). If the property is owned jointly, I recommend that one consider severing the joint tenancy, thereby creating two equal tenancies in common between Taxpayer and his spouse (each would own an undivided ½ interest in the property as tenants in common). One should check with a local solicitor regarding this matter to determine how tenancy is held and whether there are any adverse British tax consequences to severing a joint tenancy.

2. Taxpayer’s Company retirement account/IRA. This asset should be left in Taxpayer’s trust. If the IRA is left outright to Taxpayer’s spouse, there could be an immediate estate tax if Taxpayer’s estate exceeds the maximum estate tax credit (equal to $675,000 in 2000 and growing to $1,000,000 after 2006). However, if the property is left in the trust, there will not be an immediate tax. Estate taxes would be payable only if Taxpayer’s total estate exceeds the maximum estate tax credit and the principal from the IRA is drawn out by Taxpayer’s spouse. Unfortunately, Taxpayer’s wife is not treated as a 50% owner of Taxpayer’s Company retirement plan or future IRA and he cannot transfer any portion of the retirement fund to her without suffering an income tax.

If Taxpayer’s prime concern is shielding Taxpayer’s spouse from dealing with the U.S. tax and legal system, then Taxpayer’s alternative is to distribute the IRA to himself and pay the income taxes on the distribution ( a very expensive proposition). After this has occurred, to the extent Taxpayer’s estate exceeds the maximum estate tax credit, he could gift the excess amount, up to $100,000 per year, to his spouse. Under U.S. tax law, you are limited to $100,000 per year for gifts made to a NRA spouse without incurring a gift tax. There could be a treaty exception to this $100,000 limitation.

Article 8 of the U.S. – 1978 United Kingdom Estate and Gift Tax Treaty indicates that a surviving spouse would be entitled to a marital deduction in computing estate and gift taxes, but I have not found any legal authority discussing this treaty Article in light of the qualified domestic trust (QDOT) provisions enacted by the U.S. well after the treaty was signed. The QDOT rules provide that a marital deduction is permitted to a surviving non-citizen spouse only if the assets passing to the spouse are held in a special trust with a U.S. trustee and trust distributions of principal are subject to U.S. estate tax. Further research would be required on this issue.

Conclusion: I recommend leaving Taxpayer’s retirement plan in a trust. He should work with a British solicitor regarding the ownership of Taxpayer’s residence. The goal would be for each marital partner to separately own 50% of the residence, barring any adverse British tax consequences.

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