Should I Give a Large Gift to My Spouse Before Exiting the US?

Should I Give a Large Gift to My Spouse Before Exiting the US?

Should I Give a Large Gift to My Spouse

When a US Citizen or Long-Term Lawful Permanent Resident (LTR) seeks to relinquish their US person status, one of the main goals is to try to avoid being a covered expatriate. If they cannot avoid being a covered expatriate, then the next best strategy is to minimize the exit tax if possible. In order to accomplish this goal, one of the first knee-jerk reaction strategies that expatriates have is to gift their money or assets to a spouse or child. Not all gifting is the same under US tax law, so it is important to determine early in the expatriation process whether gifting to a spouse is a viable strategy for taxpayers to avoid exit tax.

Gift vs Estate and Donor vs Recipient

When it comes to gift and estate and tax, there are several moving parts that work together. Each person who is a US Citizen or resident enjoys an exclusion amount of upwards of nearly $13 million — which includes gifting and estate tax. The focus of this article is the gift rules in anticipation of expatriation. In general, there is no limitation when giving a gift to a US citizen spouse. But, when the recipient of a gift is a non-US citizen, there is a limitation as to the amount a person can give — which is currently $175,000 but adjusts for inflation.

USC and Regulations

Let’s take a look at some of the important code sections and regulations:

26 USC 2501 – Imposition of Tax

      • (a) Taxable transfers
        • General rule
          • A tax, computed as provided in section 2502, is hereby imposed for each calendar year on the transfer of property by gift during such calendar year by any individual resident or nonresident.

26 CFR § 25.2501-1 – Imposition of tax.

In general.
  • The tax applies to all transfers by gift of property, wherever situated, by an individual who is a citizen or resident of the United States, to the extent the value of the transfers exceeds the amount of the exclusions authorized by section 2503 and the deductions authorized by sections 2521 (as in effect prior to its repeal by the Tax Reform Act of 1976), 2522, and 2523. For each “calendar period” (as defined in § 25.2502-1(c)(1)), the tax described in this paragraph (a) is imposed on the transfer of property by gift during such calendar period. For gift tax rules related to an ABLE account established under section 529A, see § 1.529A-4

26 USC section 2503 – Taxable Gifts

      • General definition
        • The term “taxable gifts” means the total amount of gifts made during the calendar year, less the deductions provided in subchapter C (section 2522 and following)

26 USC 2523 – Gif to Spouse

  • Allowance of deduction
    • Where a donor transfers during the calendar year by gift an interest in property to a donee who at the time of the gift is the donor’s spouse, there shall be allowed as a deduction in computing taxable gifts for the calendar year an amount with respect to such interest equal to its value.
    • Disallowance of marital deduction where spouse not citizen
    • If the spouse of the donor is not a citizen of the United States— (1) no deduction shall be allowed under this section, (2)section 2503(b) shall be applied with respect to gifts which are made by the donor to such spouse and with respect to which a deduction would be allowable under this section but for paragraph (1) by substituting “$100,000” for “$10,000”, and (3)the principles of sections 2515 and 2515A (as such sections were in effect before their repeal by the Economic Recovery Tax Act of 1981) shall apply, except that the provisions of such section 2515 providing for an election shall not apply.

Citizens and Residents vs Non-Residents (Gift and Estate Tax Total)

When the recipient of the gift is a US citizen spouse, there is no limitation to how much a person can receive. Therefore, when a US citizen or even a resident or nonresident wants to gift tens of millions of dollars to a US citizen spouse, they are not limited by the code. This is referred to as the unlimited marital deduction. Conversely, when the recipient spouse is a non-US citizen, even if the donor is a US citizen and the recipient is a permanent resident there is a limitation on how much they can give before it impacts their total annual exclusion amount.  For example, the current exclusion amount is about $175,000 for a non-US citizen spouse. That means that if a person wants to gift more than that amount, it would impact that person’s gift and estate tax exclusion and require the filing of different forms the donor may not want to file and have on the IRS ‘record.’

Unlimited Deduction for US Citizen Recipient Only

The most important takeaway is that gifting to a non-US citizen has a limited exclusion amount. Gifting more than that can chip away at the donor’s overall exclusion amount. While the current exclusion amount between gifts and stated upwards of nearly $13 million it is not always going to remain that high –and is actually scheduled to go back down to the prior threshold in the next five years.

Giving Gifts in the Year of Expatriation

This brings us back to the concept of giving gifts during the year of expatriation. It is important to note that in order to qualify for the gift and estate tax exclusion, the donor has to be a US citizen or resident. If the donor is neither a US person nor a resident, then the exclusion rules do not apply. A key issue is when a person gives a large gift in the year of expatriation — so that they are no longer considered a US citizen or resident on the last day of the year — do they qualify for the exclusion? If not, it may result in a significant gift tax implication. When reviewing the different code sections and corresponding regulations the concern is that the IRS can take the position that at the end of the year the person was not considered a citizen or resident so those roads should not apply. An argument can be made that the gift was given while they were still a US person and the fact that the person expatriated during the year is insufficient to disqualify them from using the exclusion. conversely, the IRS can take the position that if on the last day of the year the donor is not considered a US citizen or resident then the exclusion rules do not apply.

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