We previously posted All That You Wanted to Know About Form 706NA - Part I, where we discussed that in the area of estate tax compliance, many of us have prepared Form 706’s, the estate tax return for US citizens and domiciliaries. To be sure, this form is quite voluminous and can take a while to fill out but there are very few mysteries beyond schedule E; what percentage of an asset might be includable in an estate, the value of an annuity, what debts and expenses are deductible, the calculation of the marital deduction, and the generation-skipping tax computation. The Form 706NA, however, preparation of the tax return for the estate of the nonresident alien owning property in the United States, can present a more daunting task.
Based on our estate counsel Robert Blumenfeld's 32 years of experience as a senior attorney at the International office of the IRS, some of the strange and exotic problems that he discovered upon while auditing roughly 1,500 estate tax returns and preparing about 300 of the same in the last few years.
As he pointed out, one of the critical areas for each estate is to focus on is the decedent’s citizenship and domicile. To assist the IRS in reaching a conclusion, it is best to include the death certificate (required) as well as the birth certificate, passport, and any documents revealing the fact that the decedent expatriated from one country. This information may well be beneficial in avoiding an IRS examination. The problem is that once the IRS examines a tax return for one issue (i.e. citizenship or domicile), it opens the door for the IRS to examine a number of other issues that they might not have otherwise addressed. Kind of like opening Pandora's box.
After we get through the information about the decedent himself, we reach an area of the return, Part III, General Information. Most of it is pretty obvious but… The first area of major concern may be whether the decedent died intestate. Many people who have assets in several countries have country specific wills, for instance one for the United States and one for say Canada, England etc. If the decedent did die testate, one should always include the US will. If there are other wills, go through them carefully before you submit them to the IRS because they make contain data which would create questions or problems with the IRS. In the alternative, many folks have a Universal Will which covers the disposition of assets in all countries. Because of the difference of rules from country to country, such a universal will may create problems with assets passing to a surviving spouse or a charity.
Question two addresses debt obligations or other property located in the United States. One of the major problems that I saw as an auditor was that people will value the house or condominium in the United States allocating no value to the contents. In most cases this is not a big deal but in the case of an expensive property, I, as the auditor always requested (summoned if the estate did not cooperate) a copy of the insurance policy plus the floater. Generally I found nothing specific but from time to time, I found an art collection worth several million dollars, an automobile collection worth over million dollars, and an extensive collection of rare China worse close to $1 million. If the client is wealthy or as expensive real estate in the United States, obtain a copy of the insurance floater before you prepare the 706NA to avoid great embarrassment.
Question five relates to whether the decedent owned jointly held property in the United States. If the taxpayer plans to include 100% of the value of the asset, then this question should pose no problems. Two potential problems come to light: if the decedent came from a community property jurisdiction, is one half of the value of the asset excluded by operation of law in the foreign country? If one wishes to exclude a portion of an asset from a decedent in a non-community property jurisdiction, Section 2040 of the IRC places the onus again, of proving contribution on the surviving co-tenant. This can sometimes be a very difficult task, especially if the property is been held for a substantial number of years and many records/canceled checks etc. have been destroyed over the years.
Question six asks whether the decedent had ever been a US citizen. If the answer to the initial question is yes but at the time of death, the decedent is no longer a US citizen, it is necessary to include in the paperwork sent to the IRS some evidence that the decedent properly expatriated from the United States. Based on the timing, if this happened shortly before death, it could raise the issue of expatriation to avoid tax. Again, getting this information before preparing the return is a good way to avoiding embarrassment at the examination.
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Marini & Associates, P.A.
Robert S. Blumenfeld -
Estate Tax Counsel
While with the IRS, he examined approximately 2,000 Estate Tax Returns and litigated various international and tax issues associated with these returns.As a result of his experience, he has extensive knowledge of the issues associated with and the preparation of U.S. Estate Tax Returns for Resident and Non-Resident Aliens, Gift Tax Returns, Form 706QDT and Qualified Domestic Trusts.
Read more at: Tax Times blog