Q:

Subject: British citizen living in US

I pay US income taxes. Does the estate tax apply to me if my estate is over $2,000,000 in 2006?

I also own a home in Scottland that I transferred to an irrevocable trust set up in Scotland. Is there a gift tax return for U.S. that I need to do?

Thanks,

A:

You are really going to need to work with a professional tax advisor who has real life experience with people who pay taxes in more than one country.

However, there are some key issues that will affect your situation.

In the USA, Income and Estate taxes are technically two separate systems.  In most cases, income taxes are owed to the USA government by anyone from anywhere who earns income from sources inside the USA, which could be from personal services conducted inside the USA as well as from property located here, such as rentals.  It is also the case that USA citizens have to report and pay taxes to the USA IRS on all income from anywhere in the world.  There are credits and exclusions for taxes paid to other countries to reduce the double taxation of the same income by multiple countries.

For estate (aka Inheritance and Death) tax, survivors of deceased USA citizens do have to report to the USA IRS the fair market values of all world-wide assets that were owned by the deceased on an Estate Tax Return (Form 706).  Assets that were owned by deceased USA citizens that were located inside other countries would normally have to be reported to those other countries' tax authorities.  For assets that are subject to estate taxation by more than one country, there are tax credits in a similar fashion to the income taxes in order to reduce the double taxation burden.

In your particular case, since your main estate tax reporting requirement would be to the UK tax authorities, an expert in this matter may tell you that your estate would only need to report assets located inside the USA to the USA IRS.  There would hopefully be a tax credit for your estate on its UK estate tax return to compensate for any estate tax that is required to be paid to the USA IRS.

Again, you should have an expert confirm; but I don't see how a transfer of a house in Scotland by a British citizen is anything that would need to be reported to the USA tax authorities.

Here in the USA, we actually have similar issues come up with deceased USA citizens who owned property in multiple states.  Each state generally requires those assets inside its borders go through formal probate procedures in that state, as well as be reported on that state's estate tax return, if that is applicable.  Not all states have estate taxes.

If you do have properties in the USA, there may actually be more of a mess with state probate laws than with estate tax returns.

As you see, it can get complicated.  You should try to address an many of the key issues involved in your estate planning documents so that the settlement process can go as smoothly as possible.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/09/2006 12:07:00 PM Send this post: