If you are a non-resident and non-citizen of the United States who owns U.S. assets (such as real estate or securities) or is considering acquiring a U.S. asset for your personal use or investment, please read this important briefing, which explains how U.S. taxes might apply to you.

A person who is a non-resident and non-citizen of the U.S. (a "Non-U.S. Person") could be subject to U.S. gift or estate tax on the transfer of a U.S. asset either by lifetime gift or at death. 

Estate Tax

The U.S. imposes an estate tax on all property situated in the U.S. and either owned by a Non-U.S. Person or over which a Non-U.S. Person maintains certain control. There is a $60,000 exemption from the estate tax; however, all assets over $60,000 are generally subject to U.S. estate tax (unless a tax treaty applies) at graduated tax rates that reach up to 35% and could go up to 55% beginning on January 1, 2013.  Therefore, for example, a home in the U.S. worth $1,000,000 could be subject to several hundred thousand dollars in U.S. estate tax.

Property potentially subject to U.S. estate tax includes U.S. real estate, tangible personal property (such as jewelry, art, furniture, and automobiles located in the U.S.), and securities of U.S. companies. Assets that generally are not subject to U.S. estate tax include securities that generate so-called "portfolio interest," bank accounts not used in connection with a trade or business in the U.S., and life insurance proceeds payable by a U.S. insurance company.

Gift Tax

The U.S. imposes a gift tax when a Non-U.S. Person makes a gift of property situated in the U.S. In 2012, a Non-U.S. Person may give up to $13,000 of U.S.-situs property to each individual recipient free of gift tax. Any gifts of U.S.-situs property in excess of $13,000 per recipient will be subject to gift tax (unless a tax treaty applies) at the same graduated rates as the estate tax.

The types of property subject to U.S. gift tax are similar to those subject to estate tax (and may include cash in U.S. banks), but there is one major difference: gifts of so-called "intangible personal property" located in the U.S., such as publicly traded U.S. securities, should not be subject to gift tax.  Another important exception to the gift tax is that certain payments made directly to medical and educational institutions on behalf of an individual are exempt from gift tax. 

Generation-Skipping Transfer Tax

A transfer subject to U.S. estate or gift tax can also be subject to the U.S. generation-skipping transfer tax ("GST") in addition to the estate or gift tax. The GST is imposed when a transfer is made to someone two or more generations below the transferor (e.g., to a grandchild or to a trust for a grandchild). The GST is imposed at a flat rate equal to the highest estate tax rate in effect at the time of the transfer. 

These taxes can be a trap for the unwary, but it is possible to minimize or eliminate them with proper planning. We can advise Non-U.S. Persons on how to acquire U.S. property or invest in U.S. securities in a tax-efficient manner. If you are a Non-U.S. Person who owns U.S. assets or may be acquiring an asset located in the U.S., please contact us for guidance.

This article was prepared by Stephanie E. Heilborn (sheilborn@fulbright.com or 212 318 3207), Joseph C. Sleeth, Jr. (jsleeth@fulbright.com or 713 651 5527), Philip J. Michaels (pmichaels@fulbright.com or 212 318 3179), and Michelle Schwartz (mschwartz@fulbright.com or 212 318 3110) from Fulbright's Trusts and Estates Practice. Contact your Fulbright & Jaworski L.L.P. Trusts and Estates attorney to discuss the planning options most appropriate for you and your family.

IRS Circular 230 Disclosure
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or tax-related matter[s].