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Understanding the Role of Situs in International Transfer Taxation

The U.S. situs rules are particularly instructive for expat families that include non-U.S. persons (e.g., an American abroad married to a foreign spouse), or to non-U.S. persons with investments in the United States. Moreover, while each sovereign has their own rules and interpretations of situs rules, the U.S. regime can be somewhat instructive for other countries’ situs rules. While a country-by-country discussion of the situs rules is beyond the scope of this article, many jurisdictions employ situs rules similar to the U.S.

The Interplay of Tax Treaties andForeign Tax Credits on Cross-border Estates

Currently, the United States has estate and/or gift tax treaties with sixteen sovereign nations (see Appendix A). These treaties serve several important roles in determining the transfer tax consequences of assets held within the cross-border estate, and may provide a meaningful reduction in the estate taxes by mitigating double taxation and discriminatory tax treatment while allowing for reciprocal administration. The treaty will control which treaty country can assess transfer taxes by either:

  • Determining which country is the decedent/donor’s domicile for transfer tax purposes;
  • Determining in which country the property is deemed to be located.

Certain estate tax treaties relieve some of the burden that occurs when a surviving spouse is a non-resident upon the death of the U.S. spouse by increasing the marital deduction for non-resident spouses. Moreover, where both countries have a claim and assess taxes, a tax credit regime may operate to eliminate or at least reduce double taxation.

These treaties among the pertinent jurisdictions will alter the path of estate planning. The estate planning team must evaluate the interplay of the relevant transfer tax regimes and the pertinent treaty to determine the transfer tax outcome in consideration of not only the nature of the property and its location, but also the impact of citizenship and domicile on net tax outcomes. It is extremely important to remember that the filer must specify any specific benefit under the treaty that is being claimed in the actual tax filings; otherwise, the presumed benefit is lost.

Estate tax treaty “tiebreakers” and the new/old situs rules:  Another key effect of tax treaties is that they establish tie-breaker rules. How those tiebreaker rules operate will depend on whether the treaty follows the newer or the older situs rules in U.S. estate tax treaties.