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Presenting a live 90-minute webinar with interactive Q&A

Probate Strategies When

Non-Resident/Non-Citizen Decedents

Own U.S. Assets: Legal, Tax and Practical Issues

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, JUNE 30, 2015

Dean C. Berry, Partner, Cadwalader Wickersham & Taft, New York

Jinsoo J. Ro, Norton Rose Fulbright, New York

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Cadwalader, Wickersham & Taft LLP 5

Topics

• Probate and Nonprobate Procedures for Non-US Decedents

• US Federal Estate Taxation of US Situs Assets

• US Federal Estate Tax Collection Procedures


SECTION 1 PROBATE AND NONPROBATE

PROCEDURES FOR NON-US DECEDENTS


Example #1

• Mr. X died in 2015 as a Dutch citizen and domiciliary

• Surviving heirs are a wife and two adult children, all Dutch

and non-US

• Dutch Will leaves entire estate to wife and appoints her

executor

• At death Mr. X owned a New York brokerage account with a

$1 million US stock portfolio


Alternative #1 Ancillary Probate of

Dutch Will in New York

• Requirement of original probate in Netherlands (§ 1602 of

NY Surrogate’s Court Procedure Act (SCPA))

• Application made by Dutch executor or other person

charged with administering estate (SCPA § 1604)

• Need for NY resident as designated or co-ancillary executor

(SCPA §§ 707(1)(c) and 1608(4))

• Need for authentication of Dutch legal documents (SCPA

§ 1614)

• After payment of claims, balance of NY probate estate is

payable to Dutch executor to be dealt with according to

Dutch inheritance law (SCPA § 1610)


Alternative #2 Original Probate of

Dutch Will in New York

• Possible (SCPA § 1605) but rare

• NY allows original probate in multiple jurisdictions in limited

circumstances (SCPA § 1605(2))



American Will

• Mr. X executes a NY Will for US assets and a Dutch Will for

all other assets

• NY courts have discretion to accept a nonresident’s Will for

original probate where there are probate assets in NY and

will usually do so (SCPA § 1605(1))

• Application made by executor named in US Will

• If designated executor is a nondomiciliary alien of NY, will

need a NY resident as co-executor (SCPA § 707(1)(c))



American Will (cont’d)

• Use of American Will raises choice of law issues regarding,

among other issues, the applicable law governing

testamentary dispositions

• In general, the disposition of:

– Real property is determined by law of land’s situs (§

3-5.1(b)(1) of the NY Estates, Powers and Trusts Law

(EPTL))

– Personal property is generally determined by law of

decedent’s domicile at death (EPTL § 3-5.1(b)(2))

• However, if Mr. X’s American Will provides that NY law shall

apply to the disposition of his estate, then NY courts will

apply NY law to assets situated in New York (EPTL § 3-5.1(h))


Matter of Renard, 56 N.Y.2d 973 (1982)

• French citizen and resident, who had previously been a NY

resident, executed a Will in Paris leaving New York assets to

a friend and charity, and requesting that the Will be

probated in NY and that NY law apply

• Decedent’s son, French/US citizen and California resident,

objected and claimed 50% of NY estate as his entitlement

under French law of forced heirship

• NYS Court of Appeals upheld decisions of lower courts that

rejected son’s claim on grounds that EPTL § 3-5.1(h) allows

a nonresident decedent to elect NY law to govern the

disposition of NY assets


Limits on Application of New York Law

to Nonresident Decedents

• Surviving spouse’s right of election (see, e.g., Matter of

Clark, 21 N.Y.2d 478 (1978))

• Surviving spouse’s interest in community property


Alternatives to Probate

• Nonprobate transfers

– Gifts

– Joint ownership

– Beneficiary designations

– Pay on death accounts

• Corporation or LLC for US assets

– LLC membership is an intangible personal property interest;

disposition is governed by law of decedent’s domicile at death

• Revocable trust for US assets

– New York allows a nonresident settlor to elect that a trust be governed

by New York law

– NY law will then apply to (i) real and personal property situated in NY

and (ii) personal property wherever located if trust has a NY trustee

(EPTL § 7-1.10)


Marital Property Issues

• Who is a surviving “spouse?”

• Community property issues


SECTION 2 US FEDERAL ESTATE TAXATION OF US

SITUS ASSETS


Basic Rules Applicable to US and

Non-US Persons

• The application of US transfer tax rules generally depends

on whether the transferor is a US citizen or US resident on

the one hand (“US Persons”), or a non-US citizen who is

also a non-US resident on the other hand (“Non-US

Persons”)


US Transfer Tax Definition of Resident

• A resident for transfer tax purposes is one who is domiciled

in the United States

– Domicile is acquired by living in a country, even for a

brief period of time, with no definite present intention of

moving at a later time (Treas. Reg. § 20.0-1(b)(1) (estate

tax) and § 25.2501-1(b) (gift tax))

• A resident individual for all other purposes is determined

under IRC § 7701(b)

– Substantial Presence Test

– Green Card Test

– First Year Election


US Transfer Tax Rules Applicable to

US Persons

• US Persons are generally subject to US Federal estate, gift

and GST tax on taxable transfers of property, wherever

located, at a 40% rate

• US Persons are generally entitled to an exemption from

each transfer tax. The gift and estate tax exemptions are

unified. In 2015, the maximum exemption for each

transferor is $5,430,000 for Federal estate, gift and GST tax

purposes

• All US Persons can:

– make annual exclusion gifts ($14,000 in 2015)

– elect to use portability and

– split gifts



Non-US Persons

Estate Tax

• Non-US Persons are subject to US estate tax on assets situated in the US

• Non-US Persons have a $13,000 credit (which equates to a $60,000 exemption)

from US estate tax; however US estate tax treaties may provide a greater

exemption

Gift Tax

• Non-US Persons are subject to US gift tax on gifts of real and tangible

property situated in the United States

– Unless the donor expatriated, intangible property given by a non-US

resident is not subject to the gift tax

– The IRS takes the position that Treasury bills located in the United

States are tangible assets (PLR 8138103)

– Annual exclusion for gifts ($14,000 in 2015) is allowed, but gift-splitting

is not allowed



Non-US Persons (cont’d)

Generation Skipping Transfer Tax

• Determined under estate and gift tax principles

• Although the Regulations provide that Non-US Persons are

entitled to an exemption of $1 million, the GST exemption

for nonresidents is the same as for residents and citizens

under IRC § 2631


Special US Estate and Gift Tax Rules

Applicable to Non-US Citizen Spouses

Estate Tax

• The estate of a decedent (regardless of whether a resident or non-

resident) is allowed an unlimited marital deduction for assets

passing to a US citizen spouse

• No such deduction is allowed for transfers to a non-US citizen

spouse unless the assets are transferred to a qualified domestic trust

(“QDOT”)

Gift Tax

• Gifts to US citizen spouses are entitled to an unlimited marital

deduction

• No such deduction is allowed for gifts to a non-U.S. citizen spouse

• However, larger annual exclusion gifts can be made to non-citizen

spouses than to non-spouses ($147,000 in 2015)


Filing Considerations

Form 706-NA

• $60,000 threshold (US assets)

• Usual deadlines (9 months, with 6 month extension)

• Alternate valuation

Federal Transfer Certificates


Situs Rules

Section 2104: Property situated in the US

• Real Property

• Tangible Personal Property

• Intangible Property

– Corporations

– Partnerships?


US Bilateral Estate and Gift Tax

Treaties

• Estate and gift tax treaties are designed to avoid double

taxation of transfers:

– when an individual is a citizen or resident of one

country but owns, or is transferring, property located in

another country

– when an individual is resident of multiple countries

under local laws

• A treaty generally will permit each country to tax property

located within its borders, and also may allow an increased

credit or exemption to a Non-US Person



Treaties (cont’d)

• Australia*

• Austria

• Canada*

• Denmark

• Finland

• France

• Germany

• Greece

• Ireland

• Italy

• Japan

• Netherlands

• Norway

• South Africa

• Switzerland

• United Kingdom



Treaties (cont’d)

Special note: Some countries (two notable examples being

Canada and Australia) do not have an estate or gift tax, but do

have a deemed capital gains tax (“CGT”) on death. Because

CGT is not an estate tax, a bilateral estate tax treaty may not

provide relief from double taxation


SECTION 3 US FEDERAL ESTATE TAX COLLECTION

PROCEDURES


Example #2

• Mr. Y, a Brazilian decedent, died owning a New York

brokerage account with a $1 million US stock portfolio

• Mr. Y’s sole heir, Child A, asks the broker to pay over the

account to him

• Broker refuses unless:

– An executor for Mr. Y’s estate is appointed by a US court;

or

– Child A provides broker with Federal Transfer Certificates

Q: Why did the broker refuse to pay over the assets to

Child A?

A: Concern that broker will be personally liable if Child A

fails to pay the estate tax


Responsibility for Paying US Estate Tax

– Executors and “Statutory Executors”

• The person primarily responsible for paying the estate tax is

the “executor” (IRC § 2002)

• For this purpose, “executor” means “the executor or

administrator of the decedent, or, if there is no executor or

administrator appointed, qualified and acting within the

United States, then any person in actual or constructive

possession of any property of the decedent” (IRC § 2203)

• If no executor is appointed by a US court, then “any person

in actual or constructive possession of any property of the

decedent” is responsible for paying the decedent’s estate

tax. Such a person is a “statutory executor”


Example #2 Child A’s Options

1. File for ancillary probate or administration in a New York

court

– Broker will then pay assets to US ancillary executor or

administrator

2. File for original probate of Mr. Y’s American Will in a New

York court

– Broker will then pay assets to US executor

3. Do not file in New York court, but obtain Federal Transfer

Certificates

– Broker will pay assets to Child A upon receipt of

Transfer Certificates


Personal Liability for Payment of US

Estate Tax

• The executor is primarily responsible for payment of US

estate tax

• If the executor fails to pay, the IRS is authorized to assess

and collect estate tax liabilities from:

– Persons who acquire property from the taxpayer

(“transferees”)

– Any person who exercises control over the disposition

of decedent’s property (“fiduciaries”)

– Statutory executors, but only if there is no US-court

appointed executor


Extent of Personal Liability

• Executors and fiduciaries are potentially personally liable up

to the amount of payments (including distributions to

beneficiaries) improperly made in preference over the claim

of the US Government for taxes

• Transferees are potentially personally liable up to the value

of the property received. For probate transferees, this

liability is usually imposed by US state law (See, e.g., EPTL

§ 12-1.1)

• A person who is personally liable for tax may also be liable

for payment of interest on the tax and penalties (IRC

§§ 6601(e)(1) and 6665(a)(2))


Personal Liability of Executors

• Treas. Reg. § 20.2002-1 provides that personal liability of an

executor is described in Section 3467 of the Revised

Statutes (31 U.S.C. 192). Current version of Section 3467 is

31 U.S.C. Section 3713(b) (“Section 3713(b)”)

• Section 3713(b), enacted in its current form in 1982,

provides:

“A representative of a person or an estate (except a trustee

acting under title 11 [relating to bankruptcy estates]) paying

any part of a debt of the person or estate before paying a

claim of the Government is liable to the extent of the

payment for unpaid claims of the Government”

• Treas. Reg. § 20.2002-1 defines “debt” as including a

beneficiary’s distributive share of an estate


Personal Liability of Executors (cont’d)

Allen v. Commissioner, TC Memo 1999-385

• US Tax Court determined that IRS must establish three

elements before executor will become personally liable for

unpaid claims:

– The executor distributed assets of the estate;

– The distribution rendered the estate insolvent; and

– The distribution occurred after the executor had notice of

the unpaid claims of the US

Revenue Ruling 66-43, 1966-1 C.B. 291

• IRS held that an executor is not personally liable unless he has

either personal knowledge of the debt or “has such knowledge

as would put a reasonably prudent man on inquiry”


Personal Liability of Transferees

• A “transferee” is a person with a beneficial interest in the

property transferred, and includes a donee, heir, legatee,

devisee or distributee

• Personal liability of a transferee is determined under state

law (see, e.g., EPTL § 12-1.1)

• For estate tax, trustees and certain other persons in

possession or control of a decedent’s property that is

includible in the gross estate under IRC §§ 2034-2042 are

also potentially personally liable as transferees (IRC

§ 6324(a)(2))


Personal Liability of Fiduciaries

• Section 3713(b) imposes personal liability on fiduciaries

• “Fiduciary” means “a guardian, trustee, executor,

administrator, receiver, conservator, or any person acting in

any fiduciary capacity for any person” (IRC § 7701(a)(6))

• An agent is not a fiduciary (Treas. Reg. § 301.7701-7)

• In addition, certain trustees who hold on the date of the

decedent’s death property that is included in the decedent’s

gross estate are also personally liable for the estate tax

(IRC § 6324(a)(2))


Personal Liability of Statutory

Executors or Not

• A “statutory executor” includes “the decedent’s agents and

representatives; safe-deposit companies, warehouse

companies, and other custodians of property in this

country; brokers holding, as collateral, securities belonging

to the decedent; and debtors of the decedent in this

country” (Treas. Reg. § 20.2203-1)

• In our example, the broker refused to pay the NY account to

Child A because the broker was concerned that it would be

personally liable for payment of the estate tax if Child A

failed to pay the tax

• But is it correct that the broker may become

personally liable for the estate tax?


Why Statutory Executors Are

Concerned About Personal Liability

• Treas. Reg. § 20.2002-1 states that “other persons” (which

may include statutory executors) may be personally liable

for estate tax under the predecessor of Section 3713(b)

• IRC § 6901(a)(1)(B) imposes assessment and collection

procedures to “the liability of a fiduciary” under

Section 3713(b)

• Treas. Reg. § 20.6325-1(a) states that statutory executors

“can insure avoidance of liability for taxes and penalties

only by demanding and receiving transfer certificates before

transfer of property of nonresident decedents”


Why Statutory Executors Should Not

Be Concerned with Personal Liability

• The only statutory basis for personal liability of statutory executors is

Section 3713(b)

• A statutory executor is not a “representative” of an estate within the

meaning of Section 3713(b). See, e.g., Occidental Life Ins. Co. of California

v. Comm’r, 50 T.C. 726 (1968) (holding that a statutory executor is not within

the class of persons to which the predecessor of Section 3713(b) applied)

• A statutory executor is an agent and not a “fiduciary” within the meaning of

Treas. Reg. §§ 301.7701-6 and 301.7701-7

• In CCA 200830001, an IRS Office of Chief Counsel Memorandum, the IRS

acknowledged that a statutory executor may not be personally liable for

unpaid estate tax under Section 3713(b). However, the IRS did not explicitly

conclude that there is no personal liability

• Despite these arguments, as a practical matter US banks, brokers and other

statutory executors do not want to assume the risk of personal liability and

will release assets only to a US executor or upon the receipt of Federal



Federal Transfer Certificates

• A transfer certificate is a release of lien with respect to the assets

described therein

• A transfer certificate permits the person holding the decedent’s

property to transfer the property to a foreign executor or a beneficiary

without further liability to the transferor

• Transfer certificates are issued by the IRS with respect to specific

property includible in the decedent’s gross estate

• Transfer certificates are obtained by filing an estate tax return with the

IRS (usually Form 706-NA). The return is usually filed by the foreign

executor or the heirs, but can also be filed by the US statutory

executor

• The IRS will issue transfer certificates after it has reviewed the return

and determined that the estate tax has been paid. Accordingly, it can

take many months before an estate tax return is prepared, filed and

reviewed. In the meantime, the decedent’s assets may be frozen


Affidavit in Lieu of Transfer

Certificates

• Transfer certificates are not required if the date of death

value of all the decedent’s US situs assets did not exceed

$60,000 (taking into account taxable gifts, if any) (Treas.

Reg. § 20.6325-1(b)(1)(i))

• A statutory executor will not be liable for transferring a

nonresident decedent’s property if it receives an affidavit

from the foreign executor or other responsible person in

possession of the facts that the value of decedent’s US

assets did not exceed $60,000 (Treas. Reg. § 20.6325-1(b)(3))

• Some but not all US financial institutions will accept such

affidavits


In Example #2, What If:

• Mr. Y’s only US asset was a New York bank account with

$50,000?

– Bank might accept an affidavit from Child A that Mr. Y

was not a US citizen or resident and that the value of all

Mr. Y’s US assets did not exceed $60,000

• Mr. Y was a resident of the UK at his death?

– Under the US-UK estate tax treaty, the brokerage

account would be exempt from US estate tax

– However, the broker will not want to make the

determination that Mr. Y qualified as a UK resident

under the treaty. This will leave Child A with the same

options as before


Lessons

• In practice, foreign executors and beneficiaries are usually

unpleasantly surprised by the need to obtain Federal


• They are even more displeased if the US assets are frozen

until transfer certificates are obtained

• In planning, consider structuring a non-US client’s US

assets in a manner to avoid the need to obtain transfer

certificates after the client’s death (e.g., American Will,

nonprobate transfer, LLC/corporation, revocable trust)

• Alternatively, consider whether it would be more

expedient/less expensive to apply for the appointment of a

US ancillary executor or administrator

Cadwalader, Wickersham & Taft LLP

www.cadwalader.com

Dean C. Berry Cadwalader, Wickersham & Taft LLP

One World Financial Center

200 Liberty Street

New York, NY 10281

[email protected]

212 504 6944

Jinsoo J. Ro Norton Rose Fulbright US LLP

666 Fifth Avenue

New York, NY 10103

[email protected]

212 318 3199

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