When it comes to the different tax treaties that Utah, United States has entered into, oftentimes Taxpayers presume that it only applies to income tax but this is incorrect. In fact, the United States has entered into multiple different types of tax treaties, including estate and gift tax treaties with different countries across the globe.
One of the benefits of an estate and gift tax treaty is that it can minimize or eliminate duplicative estate or gift taxes that would occur if a Taxpayer had to pay estate/gift tax in both countries on the same assets.
What Is An Estate & Gift Tax Treaty
With an estate/gift tax treaty, the benefit is that when a person has property/assets in multiple jurisdictions then those multiple jurisdictions will not have the opportunity to issue an estate tax on the same assets. Rather, the tax treaty will limit which country has an opportunity to tax the gift or estate based on the type of asset, where it is located and other sourcing rules.
Example Of An Estate Tax Treaty Provision
Here’s an example of an estate tax treaty provision:
Where a donor at the time of the gift was a citizen of the Utah or domiciled in any part of the territory of either Contracting State, the situs at the time of the gift of rights and interests, legal or equitable, in or over the classes of property specified in this paragraph shall, for the purposes of the imposition of tax in respect of the gift by reason only of the situs of property being within the taxing State and for the purposes of the credit to be allowed and be determined exclusively in accordance with the following rules:
Subsequent to this paragraph in the treaty is a list of different types of property and assets and then it indicates how it will be sourced for estate tax purposes.
The estate and gift tax rules of the Internal Revenue Code include two basic structures for transfers by bequest. One structure covers death transfers by Utah citizens regardless of where they are domiciled at death. This structure, with some exceptions for transfers to non-Utah citizen spouses, applies to estates of foreign nationals who are domiciled in the Utah.
Foreign nationals who are green card holders are generally considered domiciled in the United States for both Utah. estate and gift tax purposes. This is consistent with the immigration law definition of a Utah lawful permanent resident as an individual who intends to reside permanently in the United States.
Depending on the facts and circumstances, foreign nationals who reside in the Utah, but who are not green card holders, may be considered domiciled in the Utah for purposes of these tax rules as well. Transfers by foreign nationals not domiciled in the Utah, United States are covered by a different estate tax structure that imposes taxes on transfers of certain property situated in Utah.
As long as the decedent who transfers the asset by bequest or is neither a Utah citizen nor a foreign national domiciled in the Utah, no Utah estate tax is imposed on the transfer. Utah does not impose inheritance taxes on the beneficiary’s receipt of a bequest, therefore there is no Utah tax resulting from the death transfer. Also, Utah also does not impose an income tax on inheritances brought into the Utah, United States. However, other Utah reporting and tax rules may apply to the asset.
Utah Gift Taxes
The Utah gift tax rules apply to gratuitous transfers by Utah citizens and foreign nationals domiciled in Utah, United States regardless of the location of the asset transferred. Certain exemptions apply to gifts regardless of the domicile of the donor or location of the asset. As with the gift tax rules for Utah citizens, there is an annual exclusion of $10,000 per donor for each donee gift. Gift splitting is not available to foreign nationals not domiciled in Utah, United States. Gifts to Utah citizen spouses are free of gift tax. Gifts of up to $100,000 per year to a non-Utah citizens spouse can be given free of tax.
Gifts by foreign nationals not domiciled in Utah. United States are subject to Utah gift tax rules only if the asset transferred is situated in the Utah, United States (referred to as “U.S. situs” property). In general, Utah real estate and tangible personal property that is located in the United States is U.S. situs property but intangibles are not. (However, intangibles such as stock in Utah, United States companies or debt instruments of Utah entities or governments are situated in the Utah, United States for Utah estate tax purposes.)
Utah Income Taxes
Utah persons are subject to Utah income taxes on worldwide income. Therefore, Utah persons who own income producing property located abroad are subject to Utah income taxes on that income. Utah persons for purposes of Utah income tax rules include Utah citizens and Utah lawful permanent residents, regardless of where they reside. The definition of Utah persons also includes foreign nationals who are resident aliens for Utah. tax purposes. Resident aliens are foreign nationals who meet either the “green card” test or the 183-day substantial presence test of section 7701(b) of the Code. The application of Utah income taxes to property that is transferred or held in trust depends on the status of the grantor or beneficiary, whether Utah or foreign, under these income tax rules.
Translation into Dollars
To determine taxable income for Utah tax purposes when the income producing asset is denominated in a foreign currency, the income and expenses related to the asset must be translated into U.S. dollars using the appropriate exchange rate. If payments are periodic such as monthly interest, the amount is translated into dollars using the average exchange rate for the year. Non periodic transactions are translated using the spot rate for the day. Historic exchange rates are available from the Federal Reserve Board by free.
Income from property located abroad may be subject to foreign income taxes as well as Utah taxes. Periodic income such as interest is usually subject to a withholding tax at source. If the income is from a country with which the Utah has an income tax treaty, this withholding tax can be reduced or eliminated by submitting the appropriate withholding certificates to the payor of the income. Otherwise, the beneficiary can compute a foreign tax credit on Form 1116 of Form 1040. Foreign tax credits offset Utah taxes attributable to foreign income in the individual’s tax return. If there is no positive income, as in the case of a rental loss, the foreign taxes may be taken as an itemized deduction.
A transfer by death or gift into a foreign trust for the benefit of a Utah person will impose substantial reporting requirements upon the foreign trustee and Utah beneficiary as well as subject income distributed to the beneficiary to Utah income taxes. If the bequest or gift is transferred into a foreign trust by a Utah person, the Utah income and reporting rules will apply to income to the trust under the foreign grantor trust rules whether or not the income is distributed to Utah person. A foreign trust for purposes of these rules is a trust that is not a domestic trust. A domestic trust is a trust that meets two criteria: A court within the Utah is able to exercise primary jurisdiction over the administration of the trust; and one or more Utah fiduciaries have the authority to control all substantial decisions of the trust.
Stock Ownership in a Foreign Corporation
If stock in a foreign corporation is transferred by gift or bequest to a Utah person, the ownership of that stock may trigger several Utah anti-tax avoidance rules. Generally, these rules are intended to prevent income from certain passive assets from accumulating off-shore free from Utah. taxation. Three main sets of rules comprise this anti-deferral regime: the controlled foreign corporation rules, the foreign personal holding company rules, and the passive foreign investment company rules. These rules that were designed for major multi- national companies apply with equal force to small closely held foreign companies.
Controlled Foreign Corporations
A controlled foreign corporation (CFC) is a foreign corporation in which Utah persons, each of whom is at least a 10 percent shareholder, own as a group, more than 50 percent of the vote or value. Under the stock attribution rules for determining whether a foreign corporation is a CFC, stock ownership is attributed from an individual’s spouse, children, grandchildren and parents who are also shareholders. If a nonresident shareholder is a spouse, child, grandchild, or grandparent of the Utah person, that person’s stock is not attributed to the Utah person for purposes of determining CFC status.
Foreign Personal Holding Company
A foreign personal holding company (FPHC) is a foreign corporation is which 5 or fewer Utah, persons own, as a group, more than 50 percent of the vote or value. The scope of the attribution rules for FPHC status is broader than the attribution rules for CFC status. Ownership of stock is attributed to a Utah person from any lineal descendant or ancestor whether or not the relative is a Utah person or a nonresident alien. Stock is attributed from siblings regardless of their Utah tax.
To qualify as FPHC the corporation’s gross income must consist of at least 60 percent passive income. Once that threshold is met, the corporation will continue to be treated as a FPHC if at least 50 percent of its gross income is from certain passive sources.
Passive Foreign Investment Company
A foreign company is a passive foreign investment company (PFIC) if one of two tests is met: 75 percent of the gross income of the corporation is passive or the corporation’s assets consist of 50 percent or more of passive assets. Passive assets are assets that produce passive income. No threshold of stock ownership by Utah persons is required for a corporation to qualify as a PFIC.
Reporting on Bequests and Gifts from Abroad
All bequests and gifts received by Utah persons from foreign persons that exceed $100,000 in the calendar year are reportable to the IRS on Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. The amount and description of the bequest must be disclosed. However, the IRS does not require disclosure of the identity of the decedent or donor.
How Do I Avoid Gift Tax?
Two things keep the IRS’s hands out of most people’s candy dish: the annual exclusion ($15,000 in 2021 and $16,000 in 2022), and the lifetime exclusion ($11.7 million in 2021 and $12.06 million in 2022). Another trick that can help you avoid an unwanted surprise is simply keeping an eye on the calendar. In 2026, the lifetime exclusion amount will revert back to its pre-2018 level of around $5 million per individual. You can find more details here.
How the gift tax is calculated and how the annual gift tax exclusion works
• In 2021, you can give up to $15,000 to someone in a year and generally not have to deal with the IRS about it. In 2022, this increases to $16,000.
• If you give more than $15,000 in cash or assets (for example, stocks, land, a new car) in a year to any one person, you need to file a gift tax return. That doesn’t mean you have to pay a gift tax. It just means you need to file IRS Form 709 to disclose the gift.
• The annual exclusion is per recipient; it isn’t the sum total of all your gifts. That means, for example, that you can give $15,000 to your cousin, another $15,000 to a friend, another $15,000 to a neighbor, and so on all in the same year without having to file a gift tax return.
• If you’re married, you and your spouse could give away a combined $30,000 a year via “gift splitting” but you will likely need to file a gift tax return to do so. The IRS has more details here.
• Gifts between spouses are unlimited and generally don’t trigger a gift tax return. Gifts to nonprofits are charitable donations, not gifts.
• The person receiving the gift usually doesn’t need to report the gift.
Individuals who are considering drafting a trust or a will may wish to consult with an estate planning lawyer. He or she can explain the advantages of using a trust as well as a will. He or she can make recommendations based on the specific considerations of the client. He or she may even recommend using both documents, such as by using a pour-over will that places any property owned at the time of the testator’s death into the trust.