Immigrants and Estate Tax: Four ChoicesJanuary 20, 2017 - Phil HodgenFriday Edition
The Estate Tax
The United States has a wealth tax that is imposed at the time of death, called the “estate tax”. In round numbers, the first $5,500,000 of a person’s wealth (measured at the time of death) is tax-free, but everything above that is taxable. The top tax bracket is 40%.
You might have accumulated significant wealth before becoming a U.S. resident. You might wonder why the U.S. government should be entitled to take 40% of that away from your spouse, children, and grandchildren when you die.
It is not polite to say this out loud, but the estate tax is largely optional. The estate tax is paid by the heirs of people who do not put in the effort to eliminate it.
You, before you arrive in the United States to live, have the ability to completely eliminate the U.S. estate tax on your wealth, for multiple generations.
Below $5.5 Million Net Worth, No Tax Problem
If your total wealth is likely to be under $5,500,000 mark when you die, you do not need tax planning. There will be no estate tax imposed.
You just have a paperwork problem. Prepare your will correctly. Keep good financial records. With that, your heirs will inherit your assets, tax-free.
Since each person has an exemption amount of roughly $5,500,000, a married couple can protect $11,000,000 of wealth from estate tax after both of them die.
If Estate Tax Is Unavoidable
If the amount of your wealth means that an estate tax is unavoidable when you die, there are only four possible action plans available for you.
You deal with the future (possible) estate tax risk in one or more of the following ways:
Buy Life Insurance
Buy enough life insurance to pay whatever estate tax will be due. This means you will pay cash now to eliminate estate tax for your heirs later.
- Bad: this costs you money now.
- Good: your heirs have money to pay the tax, so they end up with more in their pockets after you die.
Whatever your heirs get, they get. If a big estate tax is payable, that is their problem, not yours. This approach is more common than you would think.
Do Something Now
Do something now (before you become a U.S. resident) so that you don’t “own” those assets for estate tax purposes. Those assets will be permanently out of bounds for U.S. estate tax.
Do Something Later
Do something later, after you become a U.S. resident, to reduce or eliminate the estate tax problem.
The Problem With Procrastination
Usually, I would tell you all of the things you can do to reduce or eliminate tax. But my objective today is to tell you why not doing something is a bad idea.
That last option — do something later — is initially attractive. It’s hard to make decisions, especially when making a decision costs you money and involves a lot of legal complexity. The payoff for the expense and headache you endure? It belongs to your heirs, not you.
It’s a bad choice. Time erodes opportunities.
- Tax-free gifts. Before you become a U.S. resident, you can make large gifts (e.g., to a trust) without incurring U.S. gift tax. Not so after you are a resident. If you want to put $15,000,000 into a trust, you can do that tax-free before you are a U.S. resident. You cannot do this after you become a resident.
- Tax problems get bigger. Time means (usually) that your net worth increases, making tax problems bigger. Every extra $100 of wealth creates $40 of tax problems for your heirs.
- Political risk. Politicians have been known to rewrite tax laws. A planning opportunity available today may not be available tomorrow.
- Reduce capital gain tax. If you own assets that have massively increased in value, it is possible — while you are a nonresident — to wipe out that capital gain for U.S. purposes. You can then sell the asset after you become a resident, without paying any U.S. capital gain tax.1
It is almost a cliché: people who get their green cards through the EB-5 system (invest $500,000, get a green card) seem to look for tax planning after they arrive. And that, of course, is too late.
- I cannot tell you the number of times someone has called with this problem. “I have owned real estate with my family in the middle of Tehran since 1968. Now the family wants to sell. Will I have to pay U.S. capital gain tax on the profit?” Answer: yes. ↩