A tale of two tax regimes: Estate planning considerations for non-domiciliaries

In Estate of Nienhuys, for example, the court articulated the fundamental principle that “a domicile once acquired is presumed to continue until it is shown to have been changed”. Accordingly, to establish US domicile for transfer tax purposes there must be: (1) a physical presence in the US, and (2) an intent to remain in the United States indefinitely. Both elements must be present, and one without the other is insufficient to establish a new domicile.

If it is determined that a taxpayer is a domiciliary of the United States for transfer tax purposes, the normal rules for US citizens apply. Transfer tax exposure generally reaches worldwide to all transfers of property, regardless of where such properties are located at the time of the transfers.

On the other hand, if it is determined that a taxpayer is a non-domiciliary of the US for transfer tax purposes, then their exposure to transfer tax liability is generally limited to transfers of properties located within the US (i.e. US-based bank accounts, real property, etc.), which may allow for greater opportunities to implement more sophisticated cross- border estate planning techniques.

While the courts and IRS take a “totality of the circumstances” approach when determining a taxpayer’s domicile for transfer tax purposes, residential property ownership in the US is one of the most important elements in the analysis. Thus, where a foreign national resides in the US and another country, the courts and the IRS will closely scrutinise many factors about each residence, including (1) the physical characteristics and relative sizes of an individual’s personal residences in their respective countries of citizenship; (2) whether the residences are owned or rented; (3) the aggregate amount of time the individual spends in each home; (4) the activities performed at or near each residence; and (5) the individual’s attitude toward each residence (i.e. which home does the individual intend to remain his or her domicile).

Although home ownership in the US is one of the most important factors to evaluate in the domicile analysis, it is not necessarily dispositive. Other factors to consider include where the taxpayer votes, maintains a driver’s license, maintains investment accounts, and lives in relation to his or her family members.

A proper analysis of whether a taxpayer is a US domiciliary for transfer tax purposes is critical in implementing an appropriate estate plan that will reduce exposure to transfer tax liability.

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