Gifts of money from a foreign person to his US child or US spouse

Non-resident aliens of the United States frequently make gifts of money to a child or spouse who is a citizen or resident of the United States (hereinafter referred to as a “US child” or “US spouse”), but few of those non-resident aliens fully understand the United States federal gift tax and income tax issues associated with making gifts to a US child or US spouse. In fact, many of them unintentionally make taxable gifts or unknowingly convert what would have been a tax-free gift to taxable income. 

Gifts of intangible property made by a non-resident alien to any person are not subject to United States federal gift tax even if the intangible property is situated within the United States. Non-resident aliens are, however, subject to United States federal gift tax on gifts of tangible property situated within the United States, except to the extent that the federal gift tax annual exclusion and any deductions are applicable.

The amount of the federal gift tax annual exclusion for gifts made during 2012 is $13,000 for gifts to any person, except that the federal gift tax annual exclusion is $139,000 for gifts made to a spouse who is not a citizen of the United States. Gifts made to a spouse who is a citizen of the United States are subject to the $13,000 gift tax annual exclusion and any excess could be offset by the unlimited gift tax marital deduction.

It is clear that gifts made during a particular calendar year by a non-resident alien to his US child or US spouse of tangible property situated within the United States are subject to United States federal gift tax to the extent that the fair market value of the aggregate amount of gifts received during that calendar year exceeds the amount of the gift tax annual exclusion, or $13,000 for gifts made during 2012.

What is not entirely clear, however, is whether money is tangible property or intangible property for this purpose, and sometimes it is not even clear whether a transfer of money should be treated as a gift in the first place. These issues are illustrated below by pointing out mistakes frequently made by non-resident aliens when making gifts of money to a US child or US spouse.

The most common mistake made by non-resident aliens when making a gift of money to a US child or US spouse is transferring money from a financial account owned by a foreign corporation or foreign partnership rather than transferring money from a financial account owned by the non-resident alien personally.

A foreign corporation or foreign partnership is normally any corporation or partnership that is not organised under the laws of any state within the United States or the District of Columbia and has not made an election with the Internal Revenue Service to be treated as a disregarded entity for United States federal tax purposes.

With certain exceptions (none of which typically applies), a purported gift from a foreign corporation or a foreign partnership to a United States person is oftentimes treated for United States federal tax purposes as taxable distribution from the entity to the US child or US spouse rather than a gift. To avoid this outcome, a non-resident alien should never make a gift to his US child or US spouse directly from a financial account owned by a foreign corporation or foreign partnership unless an exception applies that would definitively treat the transfer of money as a tax-free gift.

The second most common mistake made by non-resident aliens when making a gift of money to a US child or US spouse is transferring money that is located within the United States. Although not free from doubt, case law and guidance from the Internal Revenue Service suggests that money is tangible property.

Assuming that is the case, then the transfer of money by a non-resident alien would be subject to United States federal gift tax if such money is situated within the United States. Other IRS guidance suggests that money transferred by a check which is drawn on a personal financial account located outside of the United States is a gift of money that is not situated within the United States.

For these reasons and others, a non-resident alien should make a gift of money to his US child or US spouse only from his personal financial account (titled solely in his personal name) that is located outside of the United States4. This suggested approach should not be interpreted to mean that a gift of money made from a personal financial account located within the United States is subject to United States federal gift tax.

Instead, it should be interpreted to mean that this suggested approach should be followed due to the uncertainty related to the classification of money located within the United States.

The third most common mistake made by non-resident aliens when making a gift of money to a US child or US spouse is transferring money that is intended to be used to purchase tangible property located within the United States, such as real estate or an automobile.

Approximately forty year ago, the United States Tax Court held that a gift of money intended to be used to purchase real estate located within the United States should be treated as an indirect taxable gift of real estate rather than a gift of money.

Although this case is very old, if a non-resident alien is making a gift of money to his US child or US spouse and such money may be used to purchase tangible property situated within the United States, steps should be taken to prevent a similar result.

For example, if a non-resident alien desires to make a gift to his US child or US spouse of valuable tangible property that is easily movable, such as jewellery or art, then the physical transfer of the property by the non-resident alien to his US child or US spouse should be completed outside of the United States.

A non-resident alien should plan carefully when making gifts of money to his US child or US spouse to ensure that such gifts are not subject to United States federal gift tax and that such gifts are not treated as taxable income.

If, however, the gift is to a spouse who is a citizen of the United States, it may not be necessary to plan to minimise United States federal gift tax because the unlimited gift tax marital deduction for gifts made to a spouse who is a citizen of the United States essentially cause such gifts to be gift tax-free if the deduction is applicable and properly claimed.

 

pressiesm
SHARE
Previous articleThe future of offshore financial centres: Reputational management
Next articleAsserting Cayman’s position in Alternative Investments beyond funds
Hal J. Webb

Hal focuses on the representation of high net worth international private clients and international businesses in the areas of tax, estate planning, tax compliance, real estate and probate matters with an emphasis on foreign trusts with United States beneficiaries, and inbound tax and estate planning and voluntary disclosures.

Hal J. Webb
Partner
Cantor & Webb P.A.
1001 Brickell Bay Drive, Suite 3112
Miami, Florida 33131
USA

T: +1 (305) 374 3886
E: hal@cantorwebb.com
W: www.cantorwebb.com 

Stephen E. Nerland

Stephen received both a Juris Doctor cum laude and a Master of Laws in Taxation from The University of Miami School of Law  where he served as Secretary of the Tax Law Society for two years and was given the Book Award: Federal Income Tax I, which is awarded to the highest grade in the course. He was admitted to the Florida Bar in 2010 and now specialises in international taxation and estate planning.  Stephen advises on U.S. and international tax and estate planning for
individuals, trusts and estates. He advises individuals, trustees, and
executors with regard to the U.S. federal income, estate, gift, and
generation-skipping transfer (GST) tax. He has extensive experience
working with U.S. beneficiaries of non-U.S. trusts, and trustees
administering trusts with U.S. beneficiaries.

Stephen E. Nerland 
US Associate Tax Attorney
Withersworldwide
16 Old Bailey
London
EC4M 7EG
United Kingdom

T: +44 (0)20 7597 6397
E: stephen.nerland@withersworldwide.com
W: www.withersworldwide.com

 

 

Cantor & Webb P.A.

Cantor & Webb P.A. is focused exclusively on the representation of high-net worth international private clients and their families in tax and estate planning, tax compliance, wealth preservation, probate and property matters.

The firm is considered one of the leading boutique international tax and estate planning law firms servicing predominantly Latin American, Caribbean and European clientele. With seven attorneys specializing in the representation of high net worth international families and a multi-lingual staff that totals an additional sixteen people, the law firm rivals in size the private international client practice groups of many larger law firms.

Clients are often referred by major international financial institutions and law firms which understand that the personalized service and advice which Cantor & Webb P.A. provides to its clients brings great value in the resolution of many difficult and complex projects, including tax and estate planning for multinational families, tax compliance, pre-immigration matters, foreign investment in the United States, foreign trusts with United States assets and/or beneficiaries and foreign companies doing business within the United States.

Often used as the legal and tax component of the family office by some of its top international private clients, the firm has established a concierge oriented practice which caters to its clients' unique needs while taking great pride in going above and beyond the usual scope of work.

The firm philosophy remains providing a personalized service much more like the doctor who treats the patient rather than the doctor who merely treats the symptoms of the disease. 

Cantor & Webb P.A.
1001 Brickell Bay Drive, Suite 3112,
Miami, FL 33131


T: +1 (305) 374 3886
E:
steve@cantorwebb.com
W:
www.cantorwebb.com