US citizens – President Trump reforms US estate and gift tax

This article contains outdated information. Read our latest update: US citizenship or assets? Don’t risk excess estate tax on your death

Since our article US citizen – who me? Beware the dreaded US estate and gift tax was published, we have seen President Trump sign the ‘Tax Cuts and Jobs Act’ into law on 22 December 2017 and we are still seeing Australian senators who are not sure about their citizenship.

In the last few days, the High Court ruled Labor senator Katy Gallagher was ineligible to sit in parliament which also triggered four more members of parliament resigning.

To recap who is affected by the US estate and gift tax:

• if you were born in the US, you are a US citizen even though you may never, after you were born, lived or worked in the US and neither of your parents was a US citizen at the time you were born
• if you were not born in the US but one or both of your parents was a US citizen at the time of your birth, you may be a US citizen and
• holders of green cards and people who have made the US their permanent home will more than likely be subject to the US tax regime in the same manner as a US citizen.

What did the US tax reform change

US citizens

For US citizens the basic exclusion amount has been doubled from US$5 million (adjusted for inflation) to US$10 million (adjusted for inflation which for 2018 is US$11.18 million). The increased exclusion is scheduled to sunset after 31 December 2025 and at this stage, it is anyone’s guess whether the exclusion will reduce back to US$5 million or remain. If the proper election is made on the death of the first spouse, the surviving spouse may have a possible combined exemption of US$22.36 million (for 2018).

The exemptions from the transfer tax on gifts have also been increased:

• a US citizen can make a gift of US$152,000 (in 2018) each year to their non-US citizen spouse without incurring a transfer tax liability and affecting the current threshold of US$11.18 million
• a US citizen can make gifts of up to US$15,000 (per person) each year to each of their children and any other person without incurring a transfer tax liability and affecting the current threshold of US$11.18 million and
• gifts can be made directly to the provider for medical expenses and tuition fees up to a maximum amount each year without incurring a transfer tax liability and affecting the current threshold of US$11.18 million.

Non-US citizens

The tax reforms made no changes affecting non-US citizens who own property (including shares listed on a US stock exchange) located in the US. US transfer tax may be payable on the death of a non-US citizen if the property located in the US exceeds the threshold of US$60,000. If the tax is imposed, a reduction may be available under a treaty between the US and Australia of the transfer tax payable.

Should US citizens review their current estate plan?

Yes! The doubling of the basic exclusion amount may provide opportunities to rearrange assets and look at other strategies to reduce the value of worldwide assets. Legal advice from a US attorney who specialises in estate planning should be sought to assess whether it is possible to reduce an estate and gift tax liability.

If a US citizen is in a relationship with a non-US citizen, careful planning is required to avoid increasing the worldwide assets of the US citizen if, on the death of the non-US citizen, assets are left directly to the surviving US citizen spouse. Likewise, it is not ideal if a US citizen leaves property located in the US to a non-US citizen spouse.

Hall & Wilcox recently hosted two seminars covering the US tax reforms relating to estate and gift taxes. We were fortunate to have John Campbell and Ann Seller, (both Attorneys at Law with Kohnen & Patton LLP, Cincinnati, Ohio USA and who specialise in estate planning in the US) present on the recent changes, strategies and expatriation.

Some of the strategies discussed for Australian domiciles (including citizens) holding US assets were:

• the use of limited liability company (LLC) in the US to hold tangible US property and US real estate. As the shares are intangible property they are not subject to gift tax when transferred during life. Tax advice will be required in relation to the transfer of US property to the LLC and
• establish a partnership in NSW between two discretionary trusts to hold property in the US.

The strategies may not be suitable in all circumstances and US and Australian tax advice should be sought before considering the transfer of US assets. Advice should also be sought before US assets are purchased by non-US citizens.

How can Hall & Wilcox help?

Although we are unable to provide advice on US law (and this article must not be relied upon as an alternative to comprehensive legal advice), we are aware of the US issues and work with you and trusted US advisors to provide a tailored approach for each client which works from a US and Australian tax and succession planning perspective.