eliminate U . S . income tax on non-U . S . assets . For example , the investor could make irrevocable gifts to long-term trusts for U . S . or non-U . S . beneficiaries . These trusts can be either U . S . trusts or foreign trusts for U . S . tax purposes – typically U . S . trusts if there are U . S . beneficiaries and foreign trusts if there are non-U . S . beneficiaries . However , if it is a foreign trust for U . S . tax purposes , the trust will be taxable to the investor / trust settlor if he becomes a U . S . resident within five years of the trust ’ s creation , thereby eliminating much of the benefit of using a foreign trust .
In reality , it is often impractical to engage in planning more than five years in advance . Under these circumstances , the client should still establish the trust – to remove the assets from the U . S . transfer tax system – and invest the trust assets in such a way so as to not produce U . S . taxable income ; through tax-efficient investments or a U . S . insurance policy that allows tax-free access to the policy ’ s cash value . This will significantly reduce – if not eliminate – U . S . income tax going forward .
U . S . TRANSFER TAX
Under current law , absent a tax treaty , real property and tangible personal property located in the United States and owned by a non-U . S . person are subject to a 40 percent gift tax for lifetime transfers above $ 14,000 ($ 15,000 as of January 1 , 2018 ) if to a non-spouse , and $ 149,000 ($ 152 , 000 as of January 1 , 2018 ) for lifetime transfers to a non-U . S . citizen spouse . These same assets and more are subject to a 40 percent estate tax above only $ 60,000 if owned at death . Conversely , U . S . citizens and “ residents ” have a “ unified credit ” or unified gift and estate tax exemption amount of $ 5 million , indexed for inflation to $ 5.49 million in 2017 ($ 5.6 million in 2018 ). In other words , U . S . citizens and residents can transfer up to $ 5.49 million free of gift or estate tax .
Lifetime gifts that exceed the gift tax annual exclusion ( currently $ 14,000 per recipient ) require the filing of a U . S . Form 709 Gift Tax Return and use up some of this unified credit . Significantly , the unified credit for U . S . residents
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