How citizenship and domicile affect an estate

Income tax residence and transfer tax domicile use separate tests

The individual residence definitions apply for purposes of the Internal Revenue Code other than subtitle B, which covers estate, gift and generation skipping transfer taxes.

Those residence routes are lawful permanent residence, substantial presence and a first year election. Election eligibility and timing need separate review.

Lawful permanent residence requires immigration status granting permanent residence that has not been revoked or administratively or judicially determined abandoned.

Treaty residence ends that treatment under this provision only when foreign treaty residence begins, applicable treaty benefits are not waived and the Secretary is notified.

Domicile combines living in a place with intent

For federal estate tax, a resident decedent is someone domiciled in the United States at death. For federal gift tax, residence means domicile in the United States when the gift occurs.

For these rules, the United States includes the states and District of Columbia. Living there, even briefly, with no definite present intention of leaving can establish domicile.

Residence without intent to remain indefinitely is insufficient. An intention to change domicile does not accomplish a change without actual removal.

IRS examination guidance describes domicile as fact specific. It says a noncitizen's established U.S. domicile continues until a new domicile is established.

Citizenship and domicile affect the property considered

Federal estate tax applies to the taxable estate of a U.S. citizen or resident decedent. The gross estate can include foreign property under the applicable ownership and inclusion provisions.

Including property in the gross estate does not itself establish that tax is payable or that the property passes through probate. Applicable death tax conventions may affect the rules.

For a U.S. citizen or gift tax resident, gift tax applies to gifts wherever the property is situated, subject to the specified statutory exclusions and deductions.

Substantial presence uses weighted days

The substantial presence test requires at least 31 U.S. days in the current calendar year and at least 183 weighted days across that year and the two preceding calendar years.

Count current year days fully, the preceding year's days at one third and the second preceding year's days at one sixth. Apply statutory day exclusions before treating that formula as determinative.

These include qualifying exempt individual and medical condition days, plus separately qualifying commuting, transit and crew days. Exempt individual eligibility needs its own review.

The closer connection exception requires fewer than 183 current year U.S. days, a qualifying foreign tax home and an established closer connection to that foreign country for the current year.

The foreign tax home uses the statutory definition without its second sentence. The exception is unavailable if an adjustment of status application was pending or other permanent residence application steps were taken at any time during that year.

This exception concerns substantial presence. It does not independently override lawful permanent residence.

Review trust classification alongside the move

A trust is domestic on a day only if a U.S. court can exercise primary supervision over its administration and one or more U.S. persons can control all substantial decisions. Otherwise, it is foreign.

Apply the trust instrument and applicable law to both requirements. State formation alone does not establish them, and the individual residence tests do not apply to trusts.

An unintended change involving someone with substantial decision power can otherwise change trust residence. Qualifying events include death, incapacity, resignation and a change in that person's residence.

The trust has 12 months from the event to make necessary changes and preserve its previous classification. Without correction, classification changes from the original event unless an extension is granted.

An extension is discretionary and requires reasonable corrective actions, circumstances beyond the trust's control, a written explanation and a reasonable cause determination.

A separate deemed transfer rule concerns a nonresident alien who becomes resident within five years after transferring property directly or indirectly to a foreign trust.

For the foreign trust transfer and reporting provisions, the attributable trust portion is treated as transferred on the individual's statutory residency starting date.

Earlier undistributed net income counts in determining that attributable portion but is not otherwise taken into account under this provision. This rule alone does not establish trust ownership or tax owed.

Prepare a move timeline for professional review

Start with a dated private timeline of travel, homes, citizenship and immigration events. Gather existing wills, trust instruments, trustee information and records of transfers to foreign trusts.

Keep family locations, business records and your written plans together for the discussion. This is a preparation list, not a legal test for domicile.

Ask your advisers to address individual status and trust classification separately, then identify which questions need more detailed review.

Two related terms

Domicile: For federal estate tax, domicile means living in a place with no definite present intention of leaving. Residence alone is insufficient.

Resident trust: For federal domestic trust classification, both U.S. court supervision and U.S. person control of all substantial decisions are required. The trust instrument and applicable law determine whether those requirements are met.

An Investor Advantage perspective

This example of a practice serving German families offers a starting point for discussing language, culture and the experience you want from an advisory team.

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Common questions