CASE STUDY
Our client with US situs assets had a French and US passport and had only been resident in the UK for a short period, having spent 11 months of the year in London with her husband and three children. She is currently residing in the UK via her pre-settled status, which was attained via her French passport.
What was our client’s concern?
Our client was concerned should she pass away, her children can only inherit her wealth if the US estate tax is paid on her Situs assets, as she is a non-resident. Non-domiciled in the US means she has less protection on her US Situs assets – we explain below our basis for the cover.
What issues were faced?
The problem she faced is that the UK insurance market is generally apprehensive about providing insurance as soon as you mention anything to do with US tax.
In fact, every insurer we spoke with all advised they would be unable to provide cover, including the insurer we eventually got an offer from. International insurance was an option, however, it was far more expensive and better suited if she was going for a whole-of-life cover plan.
What was our recommendation?
Our initial recommendation was a whole-of-life policy, which would essentially provide a guaranteed payout when she passes. However, her accountants and tax advisors have a plan which they will enact in 10-15 years, which will mitigate some or all of her US situs assets.
On that basis, a term of 15 years was selected for her life insurance policy as a worst-case scenario and temporary fix to her final mitigation strategy.
How was this determined?
The basis of our calculation was to analyse and understand the U.S. estate tax implications for our client and estimate the amount of life insurance required to cover the potential U.S. estate tax liability that could arise if she passes away within the next 15 years.
Unlike income tax, which has an objective test for determining U.S. tax residency (i.e., the green card or substantial presence test), the determination of whether someone is a U.S. tax resident for estate and gift tax purposes (i.e., a domiciliary vs. a non-domiciliary), is driven by specific facts and circumstances – as such, domicile is a subjective test.
How is it determined if someone is a U.S tax resident?
An individual is considered domiciled in the U.S. if the individual is: (a) living in the U.S. and has the intention to remain in the U.S. indefinitely, or (b) has lived in the U.S. with such an intention and has not formed the intention to remain indefinitely in another country.
A residence without the requisite intention to remain indefinitely will not suffice to constitute domicile, nor will the intention to change domicile effect such a change unless accompanied by actual removal.
As a result, determining domicile is quite subjective and is based on all the facts and circumstances of the individual in question. Such domiciliary factors include, but are not limited to, where the individual’s primary residence is located, where the individual carries on family, social, religious, and business relations and activities, etc.
A person who is domiciled in the US will be subject to estate and gift taxes if the fair market value of his/her worldwide assets at death (or lifetime gifts) exceeds $12.06 million (amount for the tax year 2022).
Any excess is taxed at up to a 40% tax rate. Conversely, a non-domiciliary only has a $60,000 exemption, but only assets situated in the U.S. can be taxed (i.e., “U.S. situs” assets). The value of any U.S. assets over $60,000 is taxed at up to a 40% tax rate.
What was our client’s domicile?
Our client is considered a non-domiciliary for estate tax purposes because she does not live in the U.S., does not have a green card, and is not a U.S. citizen. As such, she could be subject to estate taxes upon death on the value of her U.S. situs assets that exceed $60,000.
After taking her US situs assets into account less her exemption, she had an estimated estate tax due of $5,000,000 or £4,325,500.
What was the solution?
After every insurer initially advised they couldn’t assist, we spoke with the insurer directly in an attempt to present the case and outlined why our client should be covered from a domiciliary point of view. The insurer went back to the reinsurer, and after several weeks they came back with an offer to cover the estate tax of circa $5,000,000.
The client was extremely happy as we secured her a standard market premium with no stipulations or exemptions and placed the policy in a standard insurance trust from issue.
Tax and trust advice was taken from her solicitors and accountants, something we always recommend in addition to our advice.
Please note: that the premiums provided are indicative only and based on this specific case study/ example, which is shown for information purposes only. Your own circumstances will determine whether the amount payable is more or less than the figure quoted.
