Answer ... (a) What taxes are levied and what are the applicable rates?
The United States does not impose a federal inheritance tax (although six states do – Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania). Instead, the United States imposes transfer taxes on transfers of wealth. The US transfer tax system is three pronged:
- A gift tax applies to certain transfers made during life;
- An estate tax applies to certain transfers taking effect at death; and
- A GST tax is imposed on certain transfers made during life or at death (or at the time of distribution in the case of a transfer from a trust) to a person (a ‘skip person’) more than one generation below the transferor.
Twelve states (Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont and Washington) and the District of Columbia impose an estate tax. Only one state (Connecticut) currently imposes a gift tax on transfers made during life.
US gift tax is imposed at a flat 40% rate on cumulative taxable gifts (other than annual exclusion gifts, described in question 2.5(d)) in excess of the gift tax exemption (which is adjusted annually for inflation and is $11.7 million in 2021). There is no gift tax exemption for non-residents, except as may be provided by treaty.
US estate tax is imposed at a flat 40% rate on a taxable estate above the estate tax exemption (which for US citizens and residents is the same amount as the gift tax exemption, and which is reduced by cumulative lifetime taxable gifts).
The United States imposes a GST tax on:
- outright transfers to skip persons (including trusts where all of the beneficiaries are skip persons);
- distributions from certain trusts to skip persons; and
- the assets of a trust where all of the remaining beneficiaries are skip persons upon the death of the last beneficiary who was not a skip person (collectively, ‘GST transfers’).
In addition to any US estate tax or gift tax applicable to the transfer, US GST tax is imposed at a flat 40% rate on cumulative GST transfers above the GST exemption amount (which is the same amount as the gift tax and estate tax exemptions).
Special rules apply to certain non-residents who previously expatriated from the United States (either by renouncing US citizenship or by relinquishing long-term lawful permanent resident status).
(b) How is the taxable base determined?
The United States imposes a gift tax on all donative transfers made by a US citizen or resident. The gift tax is also imposed on non-residents with respect to transfers of real and tangible personal property located in the United States.
The United States imposes estate tax on all property of a US citizen or resident, wherever the property is situated. This property is valued as of the decedent’s date of death (or the earlier of the date of disposal of the assets or the date that is six months after the date of death, if the effect of choosing this ‘alternate valuation date’ will be a decrease in estate tax due). Non-residents are also subject to US estate tax on certain US-situs property owned at death. US-situs property of a non-resident includes:
- real or tangible personal property with a physical location within the United States;
- shares of stock of a US corporation;
- debt obligations of a US citizen or resident or a US government entity;
- deferred compensation of a US citizen or resident; and
- annuity contracts of a US obligor.
Bank deposits and life insurance proceeds (on the life of the decedent) are not considered US-situs property of a non-resident.
GST is generally imposed only on transfers that are subject to estate or gift tax (or resulting from transfers that were subject to gift or estate tax).
(c) What are the relevant tax return requirements?
Individuals file Form 709 regarding gift and GST tax, and estates file Form 706 regarding estate tax. Form 709 is due on 15 April of the year following the gift (although a six-month extension is automatically granted on request). Form 706 is due nine months after the decedent’s death (although a six-month extension is automatically granted on request).
(d) What exemptions, deductions and other forms of relief are available?
For 2021, the exemption amount for estate, gift and GST tax is $11.7 million per individual for US citizens and residents. A deceased spouse’s unused exemption can be transferred to his or her surviving spouse (through a concept referred to as ‘portability’) to avoid wastage of the predeceased spouse’s estate tax exemption. Portability is not available with respect to a deceased spouse’s unused GST exemption.
The taxable estate of a non-resident is allowed an estate tax exemption of only $60,000. There is no gift tax exemption for non-residents.
‘Annual exclusion gifts’ are excluded from the gift tax base. These are gifts:
- of a present interest from a US citizen or resident to a donee other than a US citizen spouse or charity; and
- that do not exceed $15,000 (for 2021) per donee (or $30,000 per donee if made by a married donor whose spouse consents on a US gift tax return to having such gifts treated as having come one-half from him or her).
Outright gifts are considered to be gifts of a present interest. Gifts made in trust may be gifts of a present interest if certain withdrawal powers or termination provisions are present in the trust; the absence of such entitlements will cause a gift made in trust to not qualify as an annual exclusion gift. Gifts to a spouse who is not a US citizen that do not exceed $159,000 (for 2021) qualify for the annual gift tax exclusion. Also excluded from the gift tax base are certain transfers for a donee’s education or healthcare. Additionally, a number of deductions apply for purposes of the gift tax, the most significant of which are the unlimited marital deduction for transfers to a US-citizen spouse and the unlimited charitable deduction for transfers to qualifying charities.
The estate tax base is reduced by various:
- deductions (eg, state death taxes, debts, administration expenses and qualified distributions made to or for the benefit of a surviving US citizen spouse or charity); and
- credits (eg, the credit for foreign death taxes).
As in the case of the gift tax, the most significant estate tax deductions are:
- the unlimited marital deduction for transfers to a US-citizen spouse; and
- the unlimited charitable deduction for transfers to qualifying charities.
Transfers to a non-citizen spouse are eligible for the unlimited marital deduction only if the transfer is to a trust that satisfies certain requirements (known as a ‘QDOT’).