Donations and Succession in the United States

Donations and Succession in the United States

INTRODUCTION

In the United States there is an inheritance tax on the transfer of the taxable assets of a deceased individual, also called gross estate ("gross estate"), this tax is applied by the Federal Government. The planned tax rate reaches a maximum of 40% and a deductible is envisaged which, starting from 1 January 2018, is 11.200,000 dollars for an individual and 22 million and four hundred thousand dollars for married couples. The deductible is subject to annual indexing until the year 2025, and, if there will be no intervention by the legislator, starting from 1 January 2026, the deductible will return to the 2017 values ​​increased on the basis of inflation. The tax is applied with the same rates to subjects who are not American citizens and do not reside officially on the national territory, but who in fact are established there. In this case the deductible is only $ 60,000 and is not adjusted annually taking into account the inflation rate. In addition to the inheritance tax there is a tax on donations of all kinds, both tangible and intangible, for US citizens and residents, regardless of where the property is located. The tax is calculated on the market value of the asset at the time of the donation. There is an annual inflation-linked deductible of $ 15,000 for individuals up to a maximum of $ 30,000 for married couples. Please note that this value reduces the deductible on the inheritance tax mentioned above. The rate for the part that exceeds the excess reaches a maximum of 40%. Inheritance tax and gift tax are unified, so donations made over a lifetime reduce the deductible that can be used in succession. There is a unified table to be used for calculating both the inheritance tax and the donations. The tax base is the value of the assets exceeding the deductible, which we recall being cumulative between transfers resulting from succession or donation. Furthermore, a non-resident foreigner may be subject to the payment of inheritance and gift taxes in the United States. Specifically, a non-resident foreigner is subject to US inheritance and gift tax, solely for assets located in the United States. The definition of non-residence for inheritance and gift taxes is completely different from that of residence for income taxes. For the purposes of inheritance and gift tax, a foreigner considers himself non-resident if he is domiciled in a country other than the United States. The domicile is determined on the basis of a proof that demonstrates the intent to remain in a particular country.

TAX DOMICILE

The US tax law requires that the domicile is acquired by living in a place, even for a short period, without having the certain intention of not staying there in the future. The mere residence in a place, without the intention to remain there for an indefinite period, is not sufficient to constitute the tax domicile elsewhere, it has no effect for tax purposes except at the time of the actual transfer. Precisely because at the base of the concept of fiscal domicile are the real intentions of the person, the actual determination of the fiscal domicile is based on multiple factors, including the official documentation issued for immigration purposes (including residence visas and work permits), the 'location and weight of the person's economic interests and investments, the previous immigration records of other family members, comparisons between the value of residential properties, testimony and declarations of the person, nature and duration of trips and stays in the USA.

HOW TO MINIMIZE TAXES ON SUCCESSIONS IN THE UNITED STATES

a.The main strategy is to minimize the assets in the personal assets before obtaining residence, and where possible to maintain a certain type of control over these assets.
b.Planned donations to third parties must be made before purchasing the residence.
c. Planned donations of assets located in the United States
i) Tangible assets - Physical movement of the good outside the United States before the donation is carried out.
ii) Real Estate - Contributions to foreign companies and donation of securities of foreign companies.

American citizens and foreign nationals domiciled in the USA are subject to inheritance and gift tax with regard to tangible and intangible assets located anywhere. Controversially, foreign citizens without a tax domicile in the US are the inheritance and gift tax withholdings limited to the assets that are fiscally present in the US territory. The donation tax does not generally apply to donations of intangible assets made by foreign subjects without tax domicile in the USA.

THE SCHEME APPLICABLE TO EX-CITIZENS AND FORMER HOLDERS OF GREENCARD

American citizens who renounce citizenship and settle abroad and foreigners who leave their domicile in the USA acquire the status of "foreigners without US tax domicile" also for the purposes of inheritance and gift taxes. However, the tax regime of subjects who are former citizens or former green card holders undergoes changes with respect to the regime of applicability ordinarily to foreigners without US tax domicile.
The regulatory framework of reference has undergone changes several times until the issuing, in 2008, of the Heroes Earnings Assistance and Relief Tax Act. This legislation provides for the taxation of residents and American citizens of bequests and donations from particular categories of former citizens and former green card holders. This involves the reversal of the taxable subject, given that, ordinarily, the inheritance and donation taxes do not affect the beneficiaries of the legacies or the donors but rather on the assets of the deceased and the donor.

THE ITALY-US CONVENTION ON SUCCESSION TAXES

On March 30, 1955, Italy and the United States signed a Convention to avoid double taxation and to prevent tax evasion in matters of inheritance taxes. By virtue of the Convention, in the case of a deceased who at the time of death was a citizen or was domiciled in Italy (but was not an American citizen and was not domiciled in the USA), the US must grant the same tax relief as provided by the US domestic legislation to a deceased domiciled in the USA, multiplied by a pro-rata. The pro-rata is a fraction, whose numerator is the value of the goods actually subject to a tax in the USA, the denominator is the value of the goods actually subject to a tax in the USA if the deceased was domiciled in the USA. In addition to a tax exemption, the Convention provides for a tax deduction. The tax deduction is applied in the State of citizenship or domicile of the deceased and is equal to the amount of the tax applied by the other Contracting State in relation to the assets located in that other State and subject to taxation by both States. This deduction cannot exceed the portion of the tax applied by the nationality or domicile of the deceased and attributable to these assets.

SUCCESSION TAXES

Unlike income taxes, this group of taxes is imposed at the time of transfer for free of properties located in the USA, such as in case of inheritance or donation. There are three types of taxes that fall into this category. Inheritance tax, gift tax and transfer tax for subsequent generations. The inheritance tax is levied on the transfer of an asset located in the United States, upon the death of the owner, such as in the case of a legacy or legacy. The general rule establishes that when a foreigner transfers the ownership of an asset of this type at the time of his death, the inheritance tax is applied. The first USD 60,000 are exempt from taxation (exempt transfer) and the remainder of the value of the asset or of the estate is taxed according to a progressive rate system, with a maximum rate of 40%. To consider, however, that Italy is one of the few nations to have signed a tax treaty with the United States, making this tax almost irrelevant. However, it is important to know what the definition of an asset located in the United States is, so that your tax lawyer is aware of it and no other tax planning tools are needed.
For the purposes of inheritance tax, the following assets are considered assets located in the United States:
• Real estate within the borders of the United States;
• So-called tangible mobile goods, found in the United States (for example, cash, jewelery, works of art and cars);
• Equity investments in US companies, such as Corporations and Limited Liability Companies; is
• Property shares of insurance on another person's life.

TAXES ON DONATIONS

The donation tax is levied on transfers of assets located in the US during the life of the donor, for a value lower than the average market value of the asset. To consider that legal persons cannot make donations, and therefore this tax is generally applicable to persons and not to companies, trusts or associations. Unlike the above for the inheritance tax, there is no treaty between Italy and the United States on the tax on donations. It is therefore necessary to pay particular attention when transferring an asset located in the United States for a value lower than the market value. Furthermore, unlike what was said for the inheritance tax, the amount of the exemption is only USD 14,000 per year and per person.
For the purposes of the gift tax, the following goods are considered assets located in the United States:
• Real estate within the United States border; is
• So-called tangible mobile goods, found in the United States (for example, cash, jewelery, works of art and cars);
As an example, if you owned a second home in Los Angeles, valued at USD 500,000 and would like to donate it to your daughter, the tax on this donation would be around USD 200,000. In such a scenario it is understandable the need to resort to careful tax planning to minimize the tax consequences, such as selling the house to your daughter or donating only part of it. The transfer tax to subsequent generations is a tax that is imposed in addition to the inheritance tax and the gift tax. This tax is levied on transfers to the second or subsequent generations. These transfers are taxed at a flat rate of 40%. The assets in question will be valued at the average market value. Going back to the example above, if instead of donating the Los Angeles home to your daughter, you wanted to donate it to your nephew, you would have to pay an additional 40% fee because the donation is made to your nephew (you are actually doing a donation to a subsequent generation, from which the tax takes its name). This tax is in addition to the tax on donations that is still due.
The inheritance tax is levied on the transfer of an asset located in the United States, upon the death of the owner, such as in the case of a legacy or legacy. The general rule establishes that when a foreigner transfers the ownership of an asset of this type at the time of his death, the inheritance tax is applied. The first USD 60,000 are exempt from taxation and the remainder of the value of the asset or of the estate is taxed according to a progressive rate system with a maximum rate of 40%.