Estate Planning Newsletter

• Use of Foreign Trusts to Protect Against Creditors
  In today’s litigious society more individuals are inquiring about asset protection planning, especially those individuals with a high risk of potential exposure to liability, such as business owners, doctors, or those involved in... Read more.
• Estate Tax Rates in 2013
  Much to the relief of many, the American Taxpayer Relief Act of 2012 (“2012 Tax Act”) was enacted in the beginning of 2013, making permanent many of the tax benefits that were scheduled to expire at the end of 2012. The... Read more.
• The Legal Doctrines of Equitable Adoption and Adoption by Estoppel
  In general terms, the judicial doctrine of “equitable adoption” recognizes a valid parent-child relationship in the absence of a formal adoption procedure, holding a person who has acted like a child’s parent for a... Read more.
• Valuing an Interest in a Company for Estate Tax Purposes
  In 2001, Congress passed legislation incrementally increasing the amount exempt from federal estate taxes and completely eliminating estate taxes in the year 2010. However, the legislation contains a “sunset” provision... Read more.

• $2M lawsuit against “Patient Zero” discontinued
• Eliminating stepped-up basis could end family farms
• President Biden’s Budget Includes Big Tax Increases That Will Rock Your Tax World
• Takoda Collins estate settles lawsuit with Montgomery County for $3.25 million
• Melinda French Gates reportedly hired trust and estate lawyers in her divorce from Bill Gates, an ‘unusual’ move signaling that she could tweak their 3 kids’ $10 million inheritance

The Charitable Deduction for Non-Resident Aliens

Taxpayers who make contributions to qualified charitable organizations are entitled to a tax benefit in the form of a charitable deduction on their income taxes. However, the issue becomes more complex when a non-U.S. citizen makes a bequest to a qualified charitable organization with non-U.S. assets, and then claims a charitable deduction.

Proportional Deduction for Charitable Bequests Paid With Non-U.S. Assets

The Tax Court has held that, in order to deduct charitable bequests in full upon filing a United States Estate Tax Return, the bequests must have been funded from property subject to the U.S. estate tax. If the bequests are funded with property located outside of the U.S., then the taxpayer will only be entitled to a proportional deduction. The deduction is calculated by dividing the value of U.S. assets by the value of worldwide assets, multiplied by the amount of charitable bequests.

In one case, a Canadian citizen had assets worth $516,268 in the U.S. and more than $100 million in Canada. His will provided for charitable bequests to Canadian-registered charities, and when he died the bequests were paid out of his Canadian funds. His estate filed a United States Estate Tax Return and claimed a charitable contribution deduction of approximately $312,840. However, the IRS only allowed a limited charitable deduction of $1,615 based on the following formula: ($516,268/$100 million) x $312,840 = $1,615.

U.S.-Canada Treaty on Income and Capital

Where the charitable bequest at issue is made by a Canadian resident who owns property in the U.S., it is important to consider the U.S.-Canada Treaty with respect to taxes on income and capital as amended by the (third) protocol in 1995. Some relevant provisions of the Treaty include:

• Relief from double taxation for Canadians who had either retired to the U.S. or owned $60,000 or more of property in the U.S.
• Credit for Canadians against U.S. estate tax for up to $600,000 of U.S. assets
• Application of U.S. estate taxes only to U.S. real estate assets where value of a Canadian’s worldwide gross estate is no more than $1.2 million

Still, the Treaty also requires that charitable bequests be funded from property subject to the U.S. estate tax in order for the taxpayer to file for a full deduction.

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