My earlier blog post gave a head’s up to married couples about jointly owned assets when one spouse is a non-US citizen. The US Estate and Gift tax rules that apply with regard to jointly-owned property when one spouse is a non-US citizen differ greatly from the general rules that apply when both spouses are US citizens. Meghan and Harry will be well advised to keep this in mind as they approach their wedding day!
Today’s post provides a brief overview of the Gift tax rules that apply in the case of mixed national couples when only one spouse is a US citizen. Next week’s blog post will cover the US Estate tax rules in such an instance. First, let’s understand that the US Estate and Gift taxes are “transfer taxes” and not “income” taxes. The transfer tax is asserted against the person making the transfer, not against the recipient of the gift or bequest. So, the giver of the gift might be subject to Gift tax and, in the case of Estate tax, the estate of the individual who passed away itself must pay the taxes owed, not the heir receiving the bequest. You can learn more basics about these transfer taxes and how they apply differently to US and non-US individuals at my blog post.
US Gift Tax Rules
Special gift tax rules apply to the creation and severance of joint tenancies when one of the spouses is a non-US citizen. The rules are complicated and lead to confusion even among tax professionals. These rules, of course, are different than the general rules applicable to US citizen spouses and they often lead to unexpected and unintended tax consequences.
First, let’s look at the simple rules that apply to gifts made between spouses when both are US citizens. Very simple – no Gift Tax is imposed on the giver of the gift due to an unlimited marital exclusion. This is so because spouses are viewed as a single economic unit and shifting of assets and wealth between them is not an event that merits taxation.
There is no unlimited marital exclusion when one of the spouses is, God-forbid, an “alien”. The game changes along with the tax rules. Why? The reason is simple – the US government is concerned that the non-US spouse will be able to take the property, live outside of the US and thus, never pay US estate tax on it upon death. If Gift tax is not asserted at the time of the gift by the US spouse, then the property might escape the clutches of the US Taxman entirely. In order not to completely punish the US spouse, a “super-annual” exclusion from Gift tax is permitted each year when gifts are made to the non-US citizen spouse. For 2017, gifts of USD 149,000 can be made tax-free by a US citizen to the non-US citizen spouse. The amount is indexed annually for inflation. For calendar year 2018, the super-annual exclusion amount is raised to $152,000.
Generally speaking, the creation of a joint tenancy (including tenancy by the entirety) with right of survivorship in real property by a couple when one of the spouses is NOT a US citizen will not constitute a taxable gift at the time the tenancy is formed. Later however, a gift can occur. This will happen if the property is later severed into tenants-in-common, or if that property is sold and the non-US citizen spouse receives more than his or her pro rata share of the sales proceeds attributable to the consideration he or she provided upon purchase/improvement of the property.
By way of simple example, let’s pretend that Meghan and Prince Harry are married. Meghan uses significant money she earned from “Suits” and she alone provides all of the funds to purchase an apartment in some exotic location, naming Prince Harry as joint tenant with right of survivorship. Under the US tax rules, no gift is created at that time. Later, the property is sold and Harry takes half the sales proceeds. At that time, the gift is treated as made by Meghan to Harry, and a taxable gift will result if the proceeds taken by Harry exceed the permissible “super annual” exclusion for gifts to non-US citizen spouses. As such, Meghan may have US Gift tax liability at this time. On account of this rule, record-keeping will be critical to the dual-national couple. Accurate records must be maintained “tracing” the consideration provided by each spouse toward the property.
Other Assets (Bank and Brokerage Accounts)
Although some practitioners disagree, in my view, the creation of a joint bank or investment account by the US/non-US citizen married couple similarly may not always result in a taxable gift at the time the account is created. This is a far more complicated analysis and will involve examination of various factors, including local law. The gift may occur (along with all the tax consequences) when the account is terminated and one spouse takes an amount greater than the pro rata portion he or she contributed; or prior to termination of the account, when one spouse withdraws or takes from the account an amount that exceeds the pro rata portion of the account that he or she contributed (without any obligation to the other spouse to account for the excess).
Mixed nationality spouses often need professional tax help when they have jointly held accounts – what if the US spouse is expatriating? Does s/he own half the value of the accounts when determining the USD 2 million net worth test? Should the US spouse have been reporting half the investment income from these accounts all along on her US income tax returns? We can help you sort out such messy questions.
Joint property ownership with a US and non-US spouse can easily become a very tangled web, with frightening tax implications. While you may love your spouse, the best advice may be to make sure you KISS – Keep It Separate Sweetheart! This advice is especially important for Meghan and Harry if Meghan will eventually relinquish her US citizenship, but that is another story, perhaps to come in the future.
My next blog post will cover the nuances of the US Estate tax rules for jointly held property by the US/non-US citizen married couple.
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