Nonresident aliens (NRAs) -- citizens of foreign countries living outside the United States --  possess unique estate planning opportunities. They may be able to make gifts or bequeath property to their U.S. relatives without their beneficiaries realizing any U.S. estate, gift or generation-skipping transfer (GST) tax consequences.

Gift and Estate Taxes

Many of an NRA’s assets are completely exempt from estate tax in the United States. Accordingly, NRAs can bequeath property estate tax free. The estate tax applies only to an NRA’s gross estate situated in the United States at the time of the NRA’s death.

U.S. situated property includes U.S. real estate, tangible personal property physically located in the United States and stock in a U.S. corporation. NRAs who intend to leave U.S. corporate stock to a U.S. citizen beneficiary should avoid owning that stock directly. They can own such stock through a foreign corporation that isn’t treated as U.S. situated property. U.S. bank debt obligations and U.S. government debt obligations are treated as non-U.S. situated property. Similarly, NRAs may make gifts of non-U.S. situated property without incurring gift tax. But applicable treaty provisions between the United States and the NRA’s country might override these Internal Revenue Code rules.

GST Tax

In addition to potential tax savings, NRAs also have simplified generation-skipping transfer (GST) tax rules. A 55% GST tax is imposed on U.S. citizens when a donor makes a gift to a person who is more than one generation younger. For example, a grandparent’s gift to a grandchild would generate the GST tax. The U.S. tax code provides a $1.01 million GST tax exemption, and NRAs also benefit from a GST exemption for transfers of U.S. situated property. An NRA’s gift or bequest of non-U.S. situated property is exempt from the GST tax.

GST Trusts

NRAs may establish GST tax-exempt trusts that can remain exempt for generations. The GST tax does not apply to distributions from or terminations of such trusts if the NRA’s initial property transfer to the trust was not subject to federal estate or gift tax, regardless of the property’s location at the times of the actual distribution or termination, or the residency or citizenship of the beneficiaries.

Therefore, if an NRA transfers non-U.S. assets into a trust, then the trust would be exempt from GST tax. For example, parents who are citizens of another country and live outside the United States could place assets in trust to benefit their child and grandchildren living in the United States. The child’s estate would not include the transferred assets, and at the child’s death, the assets could pass to the NRA’s grandchildren free from transfer taxes.

The transfer of trust assets would normally trigger a GST tax, but when the grantor of the trust is an NRA, the GST tax does not apply. The tax would not apply even if after the initial transfers to the trust the non-U.S. property were replaced with U.S. situated property. In contrast, U.S. located assets the NRA owned and put in trust would be subject to both gift and GST tax.

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