The White House has announced that a tax bill making major changes to current tax law will be passed by August 2017. Seemingly lost in the discussion of what changes will be made is the repeal of the Estate Tax that is celebrating its 101st birthday, though the discussion is primarily about repeal and few are talking about what will replace it. Further removed from discussion is what will happen to the Generation-Skipping Transfer Tax and the Gift Tax law.

Impact of estate tax repeal

As a result of the current high estate tax exemption amounts, $5.49 million per individual and $10.98 million per married couple in 2017, 98.8 per cent of Americans who die in 2017 will not be subject to Federal Estate Tax. Interestingly, the 0.02 per cent who do will collectively pay on average $27 billion in estate tax. This is not an insignificant amount. So if Congress will reduce revenue by $27 billion what does President Trump have in mind to replace this revenue?

Implement a carry-over basis

A popular suggestion is to revert to 2010, the year in which there was no estate tax and which there was no step-up in basis. For those not familiar with the current estate tax law if the decedent purchased a share of stock for $15 and on the death of the decedent the stock had a fair market value of $25, when the stock was passed on to a beneficiary and then sold, the basis for determining gain or loss was the “stepped up” basis of $25. Under current estate tax law 98.8 per cent of beneficiaries benefit from this “stepped up” basis and the appreciation in the decedent’s portfolio is never taxed.

In 2010 the “stepped up” basis was replaced by a “carry-over basis”. In other words if the decedent paid $15 for the stock, when it passed to the beneficiary the basis for determining gain or loss on the sale of the stock was $15.

Deemed disposition on death

A second choice to replace the revenue of estate tax repeal is to borrow a page from the expatriation tax regime where certain individuals who relinquish their US citizenship are deemed to have disposed of all their assets the day before the date of relinquishment. This same language could be implemented into the tax law whereby a decedent would have been deemed to have sold all their assets on the day before they died and to have these assets be subject to tax in the final income tax return that they file. This option could be more attractive than the first as it would generate revenue on the death of the decedent and not on a future date when the beneficiary will sell the stock.

The expatriation regime

What we have not seen discussed is what will happen to the expatriation regime if we no longer have an “estate tax”. Unbeknown to many taxpayers, including tax practitioners, is that the current expatriation regime in which certain individuals who relinquish their US citizenship are deemed to have disposed of all their assets the day before the date of relinquishment is based on the estate tax law and not on the income tax law. Even though this law was introduced some eight years ago there is only one notice that gives practitioners guidance as to how this tax is to be implemented. We have spent hours pursuing the current estate tax law trying to decipher the mysteries of the expatriation regime. If the estate tax law is repealed, the law will be left without a current reference point.

Generation-skipping transfer tax and the gift tax

To date, we have not seen any positions taken as to whether these taxes will stay “as is” or be replaced or repealed. Waiting is not an option. Strategies such as transferring assets to a grantor retained annuity trust sales to intentionally defective grantor trusts and making annual gifts up to the $14,000 per person maximum are still effective strategies.

Beyond taxes

When protecting family assets from ex-spouses, creditors, illegitimate children and politicians, confidentiality should be a top priority. The trend is clearly to global transparency (Fatca) that is forcing private jurisdictions such as Switzerland to report the financial assets of residents and non-residents. Where do you go for privacy and security? Interestingly, many individuals are turning to jurisdictions such as South Dakota.

Foreign nationals with US tax filing obligations

The Internal Revenue Service has reminded non-US citizens who may have taxable income, such as international students and scholars who may be working or receiving scholarship funds, that they may have special requirements to file a US tax return.

The Internal Revenue Code generally requires non-US citizens, whom the code defines as either resident or non-resident aliens, who are engaged in a trade or business within the US to file tax returns. Non-resident aliens such as foreign students, teachers or trainees temporarily in the US on F, J, M or Q visas are considered engaged in a trade or business.

Most individuals in F-1, J-1, M-1, Q-1 and Q-2 non-immigrant status are eligible to be employed in the US and are eligible to apply for a Social Security number if they are actually employed in the US. Those not eligible for an SSN but who have a tax filing requirement may request an Individual Taxpayer Identification Number from the IRS.

Filing a Form 1040-NR or 1040NR-EZ is required by non-US citizens who have a taxable event such as:

• A taxable scholarship or fellowship, as described in Chapter 1 of Publication 970, Tax Benefits for Education.

• Income partially or totally exempt from tax under the terms of a tax treaty.

• Any other income taxable under the Internal Revenue Code.

Non-US citizens also must attach one copy (generally Copy B) for each Form 1042-S received to their tax returns. Non-US citizens should review the Form 1042-S to ensure it accurately reflects their name and income. If the form does not contain accurate information, they must contact the withholding agent for an amended Form 1042-S.

Pursuant to the requirements relating to practice before the Internal Revenue Service, any tax advice in this communication is not intended to be used, and cannot be used, for the purpose of (I) avoiding penalties imposed under the US Internal Revenue Code, or (ii) promoting, marketing or recommending to another person any tax related manner. The tax advice given by this column is, by necessity, general in nature. You should, of course, check with your own US tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances.

James Paul Sabo, CPA, is the president of ETS Ltd, PO Box HM 1574, Hamilton HM GX, Bermuda. Questions should be sent to: jsabo@expatriatetaxservices.com