# Inheritance after renounciation



## neverevenheardofit (Jun 21, 2014)

I'm curious about what would happen if one anticipates an inheritance or perhaps a trust fund created at some point in the future in which the amount would push the normally non-covered expatriate into covered ($2 million). 

Assuming the person was born abroad, and has lived in the U.S. and naturalized, but has remained dual. The person anticipates this windfall (and intent is for tax purposes and will move back to their native country), but renounces and declares no interest in any of these assets today, since they have yet to receive it. 

Let's say they have renounced and are waiting for the CLN, but then receive the money - would this trigger a stoppage or denial at the State Department? (Another hypothetical would there be any potential problems if the transfer of money occurred after the CLN was received? I am assuming they would not have to pay tax to the U.S. if it's received post-renunciation - only if CLN successful.


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## neverevenheardofit (Jun 21, 2014)

For the last sentence, I mean, say the assets in the inheritance appreciate before year-end 2014, they would not have to pay capital gains/exit tax on that? Further, timing things this way and receiving the inheritance would not trigger a re-assignment/branding of this individual as a "covered expatriate," correct?


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## Bevdeforges (Nov 16, 2007)

When it comes to inheritances, any taxes on transfer are normally imposed on the estate (i.e. on the decedant) and not on the person who inherits the property or money. The inheritance tax is paid by the estate before the remaining assets are distributed, and thus no tax liability accrues to the person receiving the inheritance.

Sure, if you decide to renounce after you've received a big inheritance, then whatever you got is now considered to be part of YOUR worldly weath - and if that results in your meeting the threshold for having to file expatriation taxes on renunciation, then, you gotta do what you gotta do. But a potential future interest in an inheritance shouldn't have any effect on your situation at all.

The date you want to be careful about is that of your actual renunciation. If the inherited assets haven't transfered to you by that date, they don't count.
Cheers,
Bev


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## jbr439 (Nov 17, 2013)

Bevdeforges said:


> ...
> The date you want to be careful about is that of your actual renunciation. If the inherited assets haven't transfered to you by that date, they don't count.
> Cheers,
> Bev


What would happen if the to be inherited assets are sitting in the estate (have not been distributed to the inheritor yet), but you knew you would be receiving those assets (you're the only inheritor)? Would you be obliged to include those assets in your net worth calculation?


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## neverevenheardofit (Jun 21, 2014)

One hypothetical extreme case I'm thinking about is if a dual citizen living in the U.S. won a U.S. lottery and for tax reasons, renounced so that (s)he could in the future lower his/her tax burden by living abroad - s(he) would wait to claim the prize after renouncing and not trigger the "covered expatriate" burden.


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## BBCWatcher (Dec 28, 2012)

You'd have to look at the exit tax rules. It appears they take into account annuities (which is what the lottery winnings you describe are).

I can think of one case where renunciation changes the game with inheritances: spouses. There's an unlimited spousal exemption if the recipient of the U.S. estate (at least) is both a U.S. citizen and the legal spouse of the deceased. If that recipient renounces U.S. citizenship, then any inheritance from a spouse is taxable (above the lifetime exemption). The estate pays the tax.

Another potential problem is that covered expatriates (those who renounce U.S. citizenship and are subject to the exit tax) then become somewhat toxic in various ways to U.S. persons. One of those ways is if the covered expatriate dies and leaves an estate to a U.S. person. The U.S. person then must pay income tax on the received inheritance. This is backwards from the normal arrangement, but it's how the rules are written.

There's also withholding. That is, if you are not a U.S. person and you inherit financial assets, ordinarily those assets will be subject to mandatory 30% withholding -- even the ostensibly tax free assets such as Roth IRAs. You then have to file a U.S. tax return anyway to try to get some of your money back, and the IRS has in the meantime enjoyed an interest free loan from you.

And of course if you inherit U.S. real estate -- a house in California, for example -- if you've renounced you cannot enjoy that house much.


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## Bevdeforges (Nov 16, 2007)

I'd imagine that it's pretty rare to have a US couple where only one of them renounces. (And, at that, probably only if the couple is living overseas in the first place.) The more onerous aspects of the inheritance laws for "bi-cultural couples" tend to involve a USC married to an NRA, where the couple is already living outside the US - and that's where there is greater motivation for the USC to consider renunciation.
Cheers,
Bev


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## neverevenheardofit (Jun 21, 2014)

I'm thinking one can ask the trustee of the trust/estate to hold off transferring the assets over until after renunciation.

My concern lies with how these covered expatriates are treated in the future, as you say BBCWatcher. That title is with you for life and the government has shown that they could change the laws to whatever they wanted on this class of people if they felt like it (Schumer Ex-patriot act) - completely barring you altogether or charging you as a full resident if you step foot just 1 day in the country.

Is there a way as a U.S. citizen could gift high entire estate to a foreign national wife (without U.S. citizenship) given that no gift taxes are charged? Then renounce with no assets listed. Then move to the other country.


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## BBCWatcher (Dec 28, 2012)

neverevenheardofit said:


> I'm thinking one can ask the trustee of the trust/estate to hold off transferring the assets over until after renunciation.


I _seriously_ doubt that approach would work.



> My concern lies with how these covered expatriates are treated in the future, as you say BBCWatcher. That title is with you for life and the government has shown that they could change the laws to whatever they wanted on this class of people if they felt like it (Schumer Ex-patriot act) - completely barring you altogether or charging you as a full resident if you step foot just 1 day in the country.


Possible.



> Is there a way as a U.S. citizen could gift high entire estate to a foreign national wife (without U.S. citizenship) given that no gift taxes are charged? Then renounce with no assets listed. Then move to the other country.


No, Congress thought of that many years ago. Gifts to a foreign spouse above ~$140,000 per year are counted against the lifetime ~$5.3 million exemption. The best that U.S. citizen can do (while he's living) is to give the annual limit to his/her foreign spouse. Note that there are some spousal expenses, even lavish ones, that are not considered gifts. Wealthy U.S. citizen-spouses tend to be very generous in their non-gift spousal expense payments. For example, as I understand it, paying $50,000 for your foreign spouse's plastic surgery is not considered a gift for these purposes.

There is something called a QDOT that high net worth individuals can use when leaving estates to foreign spouses. Qualified DOmestic Trusts (QDOTs) only _defer_ taxes, though. They do not eliminate tax liabilities.


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## Bevdeforges (Nov 16, 2007)

neverevenheardofit said:


> Is there a way as a U.S. citizen could gift high entire estate to a foreign national wife (without U.S. citizenship) given that no gift taxes are charged? Then renounce with no assets listed. Then move to the other country.


One minor quibble with your proposal here - you have to move to another country first, live there long enough to take their citizenship and then you renounce at the local US Consulate. You have to renounce in front of a US consular official, and those guys are only located outside the US.

There is also the practical issue of "how are you going to move to any foreign country with no passport?"
Cheers,
Bev


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## BBCWatcher (Dec 28, 2012)

When you put it that way, Bev, it certainly does seem like a lot of work to avoid an estate tax that wealthy people already know how to avoid with just a bit of estate planning.


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## Bevdeforges (Nov 16, 2007)

BBCWatcher said:


> When you put it that way, Bev, it certainly does seem like a lot of work to avoid an estate tax that wealthy people already know how to avoid with just a bit of estate planning.


This isn't the first poster to propose renouncing and then trying to move to another country. It just don't work that way. You really need to have the second nationality before you do the renunciation. 

And if you're of a legalistic turn of mind, there is still that statute on the books that says that voluntarily taking a second nationality means that your US nationality is revoked automatically. The Supremes apparently put an end to that, but hey, the statute has never been removed.
Cheers,
Bev


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## BBCWatcher (Dec 28, 2012)

I suppose you could buy one of the citizenships that's for sale -- there are a couple. But that's still much more expensive than the services of a fantastic estate planner. And you cannot avoid exit tax/covered expatriate issues. If your estate owes any tax after you leave the planet, you're definitely wealthy enough to be a covered expatriate.

Anyway, interesting idea, but I agree it doesn't work.

....But the poster is on the right track, just in the wrong direction. In addition to the QDOT I mentioned, there's an even better solution: the foreign spouse naturalizes as a U.S. citizen. Then that spouse enjoys the unlimited marital exemption and can inherit any size estate completely tax free -- and enjoy that immense estate fully in wonderful places like the shops on Rodeo Drive.


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## jbr439 (Nov 17, 2013)

BBCWatcher said:


> ...
> No, Congress thought of that many years ago. Gifts to a foreign spouse above ~$140,000 per year are counted against the lifetime ~$5.3 million exemption. The best that U.S. citizen can do (while he's living) is to give the annual limit to his/her foreign spouse.
> ...


If the plan is to renounce anyway, what's the issue with gifting up to $5.3 million to the foreign spouse? It's not like the lifetime exemption is of any use once one renounces.


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## neverevenheardofit (Jun 21, 2014)

I was born with a different citizenship...I wouldn't need to acquire another


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## BBCWatcher (Dec 28, 2012)

jbr439 said:


> *If the plan is to renounce anyway*, what's the issue with gifting up to $5.3 million to the foreign spouse? It's not like the lifetime exemption is of any use once one renounces.


(Emphasis mine.)

You can renounce for myriad reasons. Indeed, most people who renounce a citizenship probably aren't doing it for tax reasons. That'd be the case here. Renunciation of U.S. citizenship doesn't seem to make much (or any) sense at least from an estate tax point of view, but if you're going to renounce U.S. citizenship (for other reasons) then presumably you'd mitigate the tax hit as best you can.

If the idea here is that you're merely wealthy (not extraordinarily wealthy), and you provide gifts to your foreign spouse shortly before expatriation in order to get under the covered expatriate limit, that probably doesn't work. For one thing you have to file gift tax returns. It's also harder than that to escape being tagged a covered expatriate. You have to have non-wealthy income for a number of years, for example.

As an interesting side note, if a covered U.S. expatriate gives anything to a U.S. person (or bequeaths an estate to a U.S. person) the _recipient_ is then subject to estate/gift tax and (if I'm reading it correctly) from the first dollar. That's in addition to the exit taxes the covered expatriate already had to pay. Congress really, really didn't like the idea of a wealthy individual expatriating then bequeathing his/her large estate (U.S. tax free) to, say, the children or grandchildren he/she left behind in the U.S. If you're departing the U.S. in this way for these tax reasons, you have to take all your heirs with you, some/all of whom may not want to take the same journey.

....And I forgot to mention that non-U.S. persons are ordinarily subject to mandatory 30% withholding when withdrawing financial assets from the U.S. That's ugly. I ran some back-of-the-envelope math on that one, and it's a pretty serious hit due to the fact you're extending the IRS an interest-free loan until you can get your excess withholding back as a tax refund. If you don't have any assets in the U.S. then that's one thing, but if you do becoming subject to withholding isn't great either.


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