Potential Consequences for Foreign Nationals if Bush Cuts Expire

If the “Bush” tax cuts expire at the end of the year, then the estate tax exemption will go down to $1,000,000 and a top bracket of 55%. This could have a negative effect on taxpayers, particularly those who are dual nationals or have assets in foreign jurisdictions.

Currently, there are numerous foreign asset disclosure requirements — U.S. taxpayers with foreign financial accounts that accumulate more than $10,000 a year have special filing requirements beyond their income tax returns. They must also file a statement of specified foreign financial assets if they own specified foreign financial assets that are $50,000 in value at the end of the year or $75,000 at any point during the year. This is the form 8939 that is filed along with the income tax return.

If the Bush tax cuts do expire, this could leave taxpayers who own what may be illiquid foreign assets with insolvent estates because of the lowered exemption amount, and because they cannot dispose of the foreign asset or raise the money to cover the estate or gift taxes. This may cause taxpayers to ask if they filed a form 3520 in the event those foreign assets were acquired by gift or bequest. Questions may also come up regarding the valuation of the assets for U.S. estate and gift tax purposes. With these concerns in mind, before the end of the year approaches, taxpayers should consider whether they need to file required returns, implement a gifting strategy, or both.

See Sanford Millar, Estate and Gift Tax Trap for Owners of Foreign Assets, JD Supra, Apr. 24, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.