Gifting to US residents – who pays the gift tax?

I am frequently asked some variation of this question: “My father is a citizen of country X, and wants to make a gift to me. Is there any tax?”

I then get to give a lawyer’s favorite answer. It depends.

It depends:

1. Where is the person making the gift (the “Donor”) domiciled?
2. What is the citizenship of the donor?
3. Is the donor a permanent resident alien of the US?
4. Where is the person receiving the gift (the “Donee”) domiciled?
5. What is the citizenship of the donee?
6. How much is being transferred?
7. Is it being transferred all at once, or over time?
8. Is it real estate, stock or some other type of property?
9. If it is real estate or stock, where is it located?

As a general rule:

• If the donor is a US citizen or a permanent resident alien, then the gift is subject to US tax laws. It will then be considered a taxable gift if it exceeds the annual exclusion amount. As of 2009, this is $13,000.

• If the donor is neither a US citizen nor a permanent resident alien, and the gift is being made from assets outside of the US, then US tax law will not apply. In such a case, we must look to the citizenship and domicile of the donor and donee plus we must look where the property is located to determine which tax law applies.

There is a special rule for real estate and stock. This is a three step process:

1. If the real estate or stock is located in America, it is subject to US gift tax regardless of where the donor or donee live.

2. If the real estate or stock is not located in America, we must then determine the whether there is a gift tax treaty with the country where the property is located and the Donor and/or the Donee. If there is a treaty, gifts of real property are usually governed by the law of the country where the property is located, regardless of the citizenship of the donor or donee.

3. However, if the property is located outside of the US, and there is no treaty, or if the treaty is silent regarding taxing rights, then it gets to be much trickier and no rule can suffice. A knowledgeable attorney and tax adviser must look at the laws relevant to the donors, donees and property to determine which country’s tax laws apply. Keep in mind, more than one country might have the right to tax this transaction.

For example,

Let’s say a Japanese national wishes to make a cash gift ¥11,100,000 (or about $110,000) to her daughter who lives in America, then Japan has a right to tax this gift. Under Japanese law, a person receiving the property (the donee) will be taxed on the transfer.

(Note: I am assuming the daughter is still a Japanese citizen) A gift of this amount would be entitled to a tax exemption of ¥1,100,000 and the remaining ¥10,000,000 would be subject to a tax of ¥2,750,000 (or about $27,000).

Another example would be where a citizen of India makes a gift of US real estate to their child in America.

Since the property is in the US, and there is no gift tax treaty between the US and India, the United States has the sole right to tax this gift. If the house was worth $263,000, then $13,000 of the gift would be tax free. The remaining $250,000 will be subject to a US gift tax of over $70,000. See Section 2511 of the Internal Revenue Code.

(In this case, although a donor is normally responsible for the tax, the donee will become responsible as the US does not have the right to collect from a citizen of India. However, if the donee does pay the tax, it will be considered another taxable gift.)

The bigger the gift, the harder it is to completely eliminate the tax.

However, regardless of which country has the legal authority to tax the gift, most gifts can be structured in ways to reduce or eliminate the taxes with proper planning.

Gift planning can be especially valuable if the donor is over the estate or inheritance tax threshold in the United States or the donor’s home country.

By making planned gifts, this reduces the overall tax and could save anywhere from 5 cents on the dollar to 55 cents on the dollar.

Most of the planning can be done with little cost or no cost. Feel free to contact us if you would like more information.