Mexican citizens who are planning to apply for permanent residency in the United States are often surprised to learn that their new tax obligations will include the property they own or leave behind in Mexico. As such, it's vital that you consult an experienced international estate planning attorney to determine the best approach for your unique circumstances.
Gifting vs. Selling Assets
Recently, I worked with a client who was preparing to apply for permanent residency in the United States. Her spouse was a U.S. citizen, and she was experiencing some health challenges that made it difficult to continue traveling back and forth from Mexico on a regular basis. However, she was initially unaware of how her tax obligations would change when she received her green card.
Permanent residents of the United States are entitled to the entire estate tax exemption, which is $11.7 million per individual for 2021—up from $11.58 million in 2020. However, they are subject to the U.S. estate tax on all of their worldwide assets—including property owned in their home country.
To avoid creating an unnecessary estate tax burden, the client opted to gift the property in Mexico to her children. Even though there is a three-year wait period from the time of the gift for the assets to be excluded from her estate, this solution worked well because her adult children were not living in the U.S., the value of the assets were covered by the estate tax exemption, and she was willing to relinquish total control of her assets in Mexico. As long as the children plan to remain in Mexico, there are no additional tax consequences at this time for any of the family members to consider, especially when Mexico's Congress is considering enacting a federal estate tax in the near future.
If the client had wanted to sell her property in Mexico to a third party, she would have been required to pay income taxes on any gains. Also, if she had sold the assets to her children for below market value, the difference may have been considered a gift.
Implications of the Three-Year Rule
One potential drawback associated with gifting Mexican assets to avoid the U.S. estate tax is the three-year waiting period. If the owner of the assets passes away within three years of the gift, the assets are pulled back into the estate and subject to any applicable estate taxes.
The three-year rule outlined in Section 2035 of the U.S. tax code does not apply to selling assets, however. Assets that are sold are immediately removed from the estate.
Planning Ahead Is the Key to Minimizing Your Tax Burden
MEG International Counsel provides clients with international estate planning services personalized to meet their unique needs. Request our complimentary guide, The Definitive Blue Book of Estate Planning for Foreign Millionaires, to familiarize yourself with key estate planning concepts, then contact us to schedule a consultation to discuss how to best deal with the tax consequences of a planned change in residency.