Two of the biggest surprises for foreign investors when they gift money or property in the United States are that the free transfer of such gifts is subject to the federal gift tax and that they are the ones subject to the tax, not the person receiving the gift or transfer.
Lifetime Exemption and Annual Exclusion
The gift tax imposes the same levy at the same rates on free transfers as the U.S. estate tax imposes on assets after death. The gift tax applies equally to U.S. citizens and residents, whether legal or undocumented, and foreign non-residents.
There are, however, two types of exemptions available with regard to gifts or donations:
- Lifetime exemption, which to this day has a maximum limit of $11,400,000 per person, but it cannot be utilized by foreign non-residents. This exemption is equal to the estate tax exemption, which means that if the exemption is utilized to avoid the gift tax for gifts made while alive, the same exemption won’t be available to avoid or reduce the estate tax.
- Annual exclusion, is limited to $15,000 in 2019 per beneficiary. This means that individuals may gift up to $15,000 to as many beneficiaries as they wish without the obligation to pay a gift tax. But any amount that exceeds $15,000 in a calendar year will be subject to tax or will require the proportional use of the lifetime exemption if it is still available or unused.
Super Annual Exclusion for Spouse
For their part, foreign non-residents have a Super Annual Exclusion that can be exercised only and exclusively for the benefit of a foreign non-resident spouse. This exclusion is equal today to $155,000 without the obligation to pay gift taxes. Foreign non-residents cannot use this exclusion to freely transfer assets to their children or other family members.
Tangible and Intangible Assets
Now, unlike citizens and residents, foreign non-residents are only obligated to the gift tax for any free transfer of assets made while those assets are within the geographical boundaries of the U.S., and such assets are tangible.
This is to say that, assets such as stock or debt issued by American companies or individuals, which are considered intangibles, are exempt from the gift tax. This means that if a foreign non-resident gifts IBM® stock, for instance, he or she will not owe any gift tax for such transfer.
It will probably make the reader feel good to know that U.S. citizens and residents, legal or undocumented, are not entitled to this benefit. However, if the foreign non-resident dies while owning IBM® stock, its value at the time of death or the alternative valuation date (generally six months after death), will be subject to estate tax.
Opportunities and Obstacles
Based on the foregoing, if a foreign non-resident wants to avoid the gift tax for the free transfer of a tangible asset whose value exceeds the Annual Exclusion or the Super Annual Exclusion, he will have to take the money out of the United States to make the gift in order to avoid the gift tax. In case the foreigner does not want to or cannot take the money out of the country, as is the case with real property, he will have to consider converting the tangible asset into an intangible one and then gifting it to avoid the gift tax.
An example of the above is when parents intend to gift an amount of money to their children when the money is already located in a bank account in the United States. Because money is considered a tangible asset, its free transfer triggers the gift tax. However, parents can use cash to buy stock, and after a prudent time, gift the stock to their children.
Because stock is considered an intangible, its free transfer would not trigger the gift tax, as long as a prudent time has elapsed to avoid a determination by the IRS that the purchase and sale of the stock is part of a step-transaction. Thus, if the children need the cash, they can sell the stock and recover it. However, this transaction carries the additional risk that the stock market drops between the purchase and the sale of the stock and losing money during the conversion.
Other very common situations in which unintended gifts are made, triggering the gift tax, are:
- When real estate is sold that was originally titled as a joint tenancy with right of survivorship between two foreign non-resident spouses without both putting up the money to buy the property or pay for the down payment and the loan.
- When after buying such property, it is sold and the proceeds are deposited in a bank account in the United States that includes the name of the spouse that did not contribute funds to the purchase of the property.
There are other circumstances in which unknown and unintended gifts are made that trigger the gift tax that make it necessary to consult legal advisors before proceeding with the transfer or change of ownership of an asset located in the United States.