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[Title] A-Z of Spanish Probate

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[Title] A-Z of Spanish Probate United States A-Z of U.S. Estate Planning Concepts This glossary is directed mainly at the solicitor whose clients are American, have assets in America, or U.S. family members who are beneficiaries of trusts. The U.S. Federal government imposes income and capital taxes on its citizens regardless of their residence or their domicile. However, the Federal government does not have its own probate or trusts law. The United States is composed of the District of Columbia and 50 states, each of which have their own probate, Wills, trusts and tax laws. Many states have adopted "uniform" laws that are promulgated by the Uniform Law Commissioners in an effort to create some uniformity among the laws of the various states. Uniform laws in the private client area generally include the Uniform Trust Code, the Uniform Probate Code, and the Uniform Principal and Income Act, which is the most widely adopted of the Uniform Laws in this area. See www.uniformlaws.org. Many states have adopted tax codes that mirror the U.S. Federal tax code in varying degrees. All Section or § references below are to the United States Federal Internal Revenue Code of 1986, as amended (the “Code”) and to the Treasury Regulations promulgated thereunder (the “Regulations”). A Administrator (or executor) The terms administrator and executor generally have the same meaning under U.S. law as they do under English law. The term "personal representative" is also used in the United States. However, for U.S. Federal estate tax purposes, the term “executor” means the executor or administrator of the decedent (i.e., the deceased), or, if there is no executor or administrator appointed, qualified, and acting within the United States, then any person in actual or constructive possession of any property of the decedent. § 2203. B Bare Trust The concept of a bare trust is generally unknown in the United States and is equivalent to the concept of a nomineeship. The U.S. rules are quite literal and in certain circumstances may be construed as creating a trust (however bare) where a nominee relationship is intended by the parties. It is preferable not to include the words (upon trust) in documents drafted for U.S. persons where it is not necessary to do so. Barrister and solicitor (lawyer or attorney) The U.S. legal system does not distinguish between solicitors and the Bar. Lawyers are admitted to practice on a state by state basis and may be permitted to practice before individual Federal district courts and courts of appeals and other specialist courts (such as the Federal Tax Court). C Charities Many States regulate charities as well as solicitations made on behalf of charities. Tax relief is available at the State and Federal levels. The primary tax exemption is provided by the U.S. Internal Revenue Service (“IRS”) which recognises charities as being tax exempt under Section 501(c)(3) of the Code. The income (§ 170), gift (§ 2522) and estate (§ 2055) tax charitable deductions are all drafted slightly differently from one another. As a general matter however gifts to an organization that is described in Section 501(c)(3) will qualify for the U.S. Federal gift and estate tax charitable deductions. Gifts to such an organization will qualify for a U.S. Federal income tax deduction if that organization is organized under the laws of the United States (regardless of where the organization is domiciled). Civil partnership Same-sex couples' rights and responsibilities are recognised in various states and the District of Columbia. In 2013 the U.S. Supreme Court invalidated the "Defense of Marriage Act" (see U.S. v. Windsor) which prohibited the U.S. Federal government from recognising same sex marriages. Same-sex couples who are married (as opposed to being civil partners or other same sex unions) must be recognised by the U.S. Federal government. Codicil Wills may be amended by codicils. A codicil must be executed in the same manner as a will. The term is the same in England and the United States. Court of Protection These issues are dealt with by different courts in different States (e.g., the Orphan's Court in Pennsylvania, the Surrogate's Court in New York). D Disclaimer of interest (deed of variation) When a deed of variation involving U.S. situs assets or U.S. Person beneficiaries is executed, it is important to ensure that none of the parties are inadvertently making a taxable gift. Deeds of variation are not tax neutral for U.S. Federal tax purposes. A timely disclaimer which complies with the requirements for a disclaimer under Federal (§ 2518) and State (or other local law) will not trigger a gift tax liability. Distributable net income (or "DNI") For US Federal income tax purposes, the allocation of a non-grantor trust’s income (and gains) is made each taxable year between the trust and the trust’s beneficiaries by reference to the trust’s DNI, which is an amount calculated under a formula set out in the Code (§ 643). Broadly, for “foreign” non-grantor trusts, DNI equates to the trust’s total net income (including net capital gains and tax exempt interest) before any distributions to beneficiaries. DNI of a domestic non-grantor trust generally does not include capital gains. Domestic trust A trust is either domestic or foreign for U.S. Federal income tax purposes. If a court within the United States is able to exercise primary supervision over the administration of the trust (court test) and one or more U.S. Persons have the authority to control all substantial decisions of the trust (control test), then the trust is a domestic trust for U.S. income tax purposes (§ 7701(a)(30)). Domicile The concept of domicile, as understood under English law, exists in the United States and may be relevant when determining whether an individual is domiciled in one U.S. state versus another. However, the United States taxes its citizens on a worldwide basis and therefore the concept of domicile (where citizens are concerned) is largely irrelevant. Domicile is relevant for determining whether an individual who is not a U.S. citizen is subject to U.S. Federal transfer taxes, as an individual who is “domiciled” in the United States under the Code is subject to U.S. Federal transfer taxes on gratuitous transfers of his worldwide assets (§ 20.0- 1). F Foreign trust A trust is classified as a foreign trust for U.S. Federal income tax purposes if it does not meet the classification of a domestic trust (§ 7701(a)(31)). Therefore, if a trust fails either the court test or the control test, it is classified as a foreign trust for U.S. Federal income tax purposes (§ 301.7701-7). Foreign wills It is possible to dispose of U.S. property under a foreign Will. However, when dealing with U.S. citizens and individuals who are domiciled in the United States for U.S. Federal transfer tax purposes, it is important to ensure that any non-U.S. Will takes into account all relevant U.S. tax issues, including any State-level tax issues. G Gift inter vivos U.S. citizens and domiciliaries currently enjoy a U.S. Federal lifetime gift tax exemption amount of $5,430,000 (indexed annually for inflation). Unlike the U.K. nil rate band, once the exemption is exhausted, it does not renew except to the extent of increases in the exemption due to annual inflation adjustments. The U.S. Federal lifetime gift tax exemption amount and the U.S. Federal estate tax exemption amount are “unified”, meaning that use of the gift tax exemption during lifetime reduces the estate tax exemption amount available upon death, dollar for dollar. Non-citizens who are not domiciled in the United States for U.S. Federal transfer tax purposes do not have a lifetime gift tax exemption amount; however, such individuals are generally only subject to U.S. Federal gift tax on gratuitous transfers of certain U.S. situate property, such as U.S. real estate. Gifts Ordinarily Made Out of Income The U.S. corollary to "gifts ordinarily made out of income" are "annual exclusion" gifts. Every individual, whether a U.S. citizen, domiciliary, resident or non-resident, may make gifts of up to $14,000 per calendar year to an individual or organization without making a taxable gift. The annual exclusion amount applies per donee, per calendar year. The gift must be a gift of a "present interest" (as opposed to a future interest). The amount of the annual exclusion gift that can be made to a non-U.S. citizen spouse is $147,000 (indexed for inflation). This increased annual exclusion amount is permitted in lieu of the unlimited gift tax marital deduction available with respect to gifts to a U.S. citizen spouse. Grantor trust An ordinary trust (as opposed to a business trust) is classified as either a “grantor trust” or a “non-grantor trust” for U.S. Federal income tax purposes. A trust that is classified as a “grantor trust” is not considered a taxpayer for U.S. Federal income tax purposes. Rather, for the person deemed to be the owner of the trust (the “grantor”) for U.S. Federal income tax purposes is treated as the tax owner of the trust’s underlying assets and the income and gains generated on such assets. If a trust is classified as a grantor trust, its grantor includes all items of trust income, gain, deduction, etc. in computing his taxable income as if he had received such items directly.
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