US estate-tax volatility – friend or foe?
Many US citizens residing in Israel do not realize that US taxes pertain to them, can significantly impact their family.
Your Taxes Photo: Thinkstock/Imagebank
Many US citizens residing in Israel do not realize that US taxes pertain to them
and can have significant consequences for their family.
regardless of country of residency, are subject to the US federal estate tax
upon death on their worldwide assets.
The good news is that through
December 31, 2012, all US citizens have a global exemption from this tax of
$5,120,000 per person (decedent). The bad news is that it is anyone’s guess what
the tax will be starting January 1, 2013, though many claim to have a crystal
What are the main rules for US citizens?
A US citizen’s entire
estate is taxed in the US upon death – worldwide. This includes pension plans,
life insurance, real estate of any kind, all types of investments, etc. If you
own something in any way whatsoever, the IRS considers it part of your estate
upon death. And if no legislative action is taken before December 31, as of
January 1, 2013, a US citizen’s exemption from the US federal estate tax may be
a mere $1,000,000.
Unfortunately, the US federal estate tax applies to
the entire value of an asset on the date of death – not to the increase in value
from when one purchased or acquired it. It is essentially a tax on many other
taxes; income tax was paid on interest, dividends, rent received, etc., and
capital- gains taxes were paid, or will be, once the asset recognizes
Federal exemption reduction
Another significant increase in the US
federal estate tax over the 24-hour period from December 31, 2012, to January 1,
2013, could be a rate hike from 35 percent to 55%. This means that instead of
owing 35% of the value of a US citizen’s assets over $5.12 million, 55% of the
value of the US citizen’s assets over $1m. will be owed.
At US state
In addition to the US federal estate tax, state estate taxes exist in
several states as well. Thus, an asset located in the US is typically subject to
both the federal and state estate taxes.
The future of state estate taxes
is no longer routinely dependent upon whether a federal estate tax is in effect.
Many states decided to sever any ties to the existence of the federal estate tax
in 2010, when the federal estate tax did not exist for a year.
state legislatures realized that they would lose revenues if they continued to
have their state estate taxes linked to the application of the federal estate
For example, New York’s highest state estate tax rate is 16% of the
value of the assets located in New York on the date of death, over an exemption
amount total of only $1,000,000 in assets located in the State of New York. The
majority of real estate in New York State is worth more than this exemption
What can we expect at the federal level?
Will the US Senate and
Congress really let the above changes happen? Your guess is as good as any. This
does not instill a warm and fuzzy feeling of trust and safety among voters in
this election year. It is therefore not surprising that numerous congressmen and
senators introduced bills to eliminate the US federal estate tax altogether. All
the Republican presidential candidates supported eliminating the federal estate
What is President Barack Obama’s stand on the elimination of the US
federal estate tax? When campaigning in 2008, then senator Obama was against a
full repeal of the tax, favoring instead a $3.5m. exemption and 45% tax rate on
any assets worldwide, above the exemption amount. These were the specifics of
the tax in 2009. This begs the question of why did Obama refrain from acting
toward this end throughout the calendar year of 2010, in light of it being
nonexistent for that year alone.
Rather, only in late December, 2010, did
Obama and Senate Republican leaders reach an agreement on the nature of the
federal estate tax. This is the law that is in place today. From its inception,
it was decided that this bipartisan law would only be valid for two years:
During this process, House Democrats strongly opposed the hike
in the exemption amount and decease in rate, attempting to pass a bill that
would have reinstated the 2009 exemption amount and tax rate, which matches
Obama’s original plan for the federal estate tax ($3.5m., 45%).
general consensus among estate planning practitioners and others is that as in
previous years, and particularly in a presidential election year, Congress may
drag its feet and wait until the very last minute to act, if at all. This could
mean a bill passed at the end of this year, or even at the beginning of next
year. The options raised include:
• Repeal of the federal estate tax;
nothing and enabling the current law to expire, significantly reducing the
exemption amount while raising the tax rate;
• Extending the current law beyond
the end of this year;
• Reaching another bipartisan agreement on an exemption
amount ranging $3.5m.- $5m. and on a rate of 35%-55%;
• Something new that has
been yet been raised or attempted in recent decades.
How should US
citizens plan for the unknown?
Some are utilizing this year to gift as much of
one’s estate as possible. The $5.12m. exemption is from the federal gift tax as
well (yes, there is also a US federal gift tax that is applicable to all US
citizens regardless of residence). With many asset values depressed, US citizens
are encouraged to transfer their ownership to those who would inherit them
Such a plan is based upon the belief that asset and property
values will increase by the time the US citizen estate-planning client passes
away. Therefore, $5m. worth of assets in 2012 will be worth much more than that
in five, 10 or 20 years time, upon such client’s death. This is the highest the
exemption from the US federal gift tax has ever been since its enactment in
1932. Depending upon how the assets are gifted, an added bonus for such planning
can be asset protection from creditors, former spouses and the
However, most people are not yet willing to relinquish such control
on a significant amount of their assets. Other planning options are available
that appear less drastic than massive gifting. One such solution is creating a
trust that will utilize both US citizen spouses’ exemptions from US federal
estate taxes, no matter what the exemption amount.
well-versed practitioners are available to proffer solutions appropriate for
each family. Be sure you trust your estate planner and make sure you receive a
recommendation from someone you trust as to the estate planner’s expertise in
this practice area.
What about non-US persons?
Non-US citizens are only
subject to the US estate tax if they hold US investments (even if through a
foreign bank) or own any assets that are actually located in the US. The
exemptions discussed above do not pertain to non-US citizens.
techniques are available for minimizing the exposure of non-US persons US estate
tax; for example, consider investing in US securities via a non-US
What about Israeli taxes?
Israel does not have an estate
tax. The Trajtenberg Committee recommended against one. Nevertheless, Israel
does have a backdoor tax on inheritances in the form of capital-gains tax. This
is because Israeli residents who inherit assets and later sell them pay Israeli
capital- gains tax on the sale value minus the donor’s cost, applying the
donor’s purchase date.
To minimize this exposure, donor’s should in their
lifetime consider leaving the assets concerned in a trust that meets certain
conditions. Failing this, the recipient should consider requesting a “step-up” of
the cost to the probate value upon the death of the donor. Specialist advice is
As always, consult experienced tax advisers in each country
at an early stage in specific cases.
Felicia M. Seaton, esquire, practices US estate planning for
Americans living in Israel and for others investing in the US. Leon Harris is a
certified public accountant and tax specialist at Harris Consulting & Tax