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Cross-Portfolio Investment Optimization

Cross-Border Issues that Amplify the Complexity of Estate Tax Planning
U.S. Estate Tax Basics
U.S. taxation – “exceptional” in reach and scope: America is “special” in many ways, but few aspects of American “exceptionalism” are as tangible as the way the U.S. Treasury levies taxes on its citizens who leave its borders to live and work abroad. While the global income taxation of U.S. citizens gets far greater attention, U.S. transfer taxes apply no matter where a U.S. citizen lives, gifts property, or dies. While expat Americans do enjoy income tax relief in the form of the foreign earned income exclusion, there is no transfer tax corollary for expats. Accordingly, the expat should expect the U.S. Treasury to impose estate tax at his or her death upon all worldwide assets, including proceeds of life insurance policies, retirement assets, personal property (including investments), real estate, and other assets. Additionally, estate tax may be owed on certain assets transferred to others within a fixed time period before death, or where the decedent retained an interest in the property.

Currently, the vast majority of Americans, at home or abroad, have little concern for U.S. federal estate taxes. Recent estate tax law changes have significantly increased the federal estate and gift tax lifetime exclusion amount to very high thresholds:

$11.2 million personal lifetime exemption (2018).
Interspousal transfers: gifts and bequests (during your lifetime or upon death) between spouses are unlimited (to citizen spouse).
Portability of unused exemption to surviving spouse: Beyond that, if the first-to-die spouse’s exemption amount is not fully utilized, an election on that estate tax return will preserve the remaining unused exemption amount for the second-to-die spouse.
Accordingly, with a $22.4 million-per-couple exemption, most Americans feel that the estate tax is something that can be ignored.

That said, the U.S. federal estate tax regime may be described as in a state of flux, with some policymakers calling for its complete abolition, and others seeking to return the exemptions to much low-er levels. At present, the recently doubled exemp-tions are slated to sunset in five years (2023), returning to pre-2017 tax reform levels. Moreover, a laissez-faire attitude to estate planning is far less justified if the U.S. citizen client is married to a non-U.S. citizen. If the non-U.S. citizen is the surviving spouse, the unlimited marital deduction will not be available and the likelihood of estate taxation upon the death of the first spouse increases. Transfers during lifetime to the non-U.S. citizen spouse can reduce the U.S. citizen spouse’s estate, but the annual marital gift tax exclusion is reduced from unlimited to $152,000 (2018). In short, since no one can confidently predict where the estate