Many immigrants to the U.S. obtain a greencard, but do not become U.S. citizens. The greencard gives an individual the right to permanently reside in the United States.
Most U.S. tax rules are the same for U.S. greencard holders as for U.S. citizens. However, there are a few peculiar rules that can unexpectedly trigger taxes. For instance, say a husband (“Husband”) who is a U.S. citizen is married to a non-citizen wife (“Wife”). Husband owns 100% of a U.S. limited liability company (the “LLC”). The fair market value of the LLC is $3,000,000.
For asset protection purposes, estate planning purposes, or for whatever reason, Husband decides to gift one-third of the LLC interest to Wife. The value of the gift is $1,000,000 (for simplicity, ignoring possible discounts).
Husband and his advisor don’t realize that special rules apply to gifts to non-citizens. Unfortunately, the normal marital deduction for gifts between spouses does not apply where the recipient spouse is not a U.S. citizen. Code § 2325(i).
A partial mitigating factor is that the annual gift tax exclusion provided by Code § 2503(b) ($13,000 for 2010) is increased for gifts to non-citizen spouses. For 2010, this exclusion equals $134,000. See Rev. Proc. 2009-50. The gift from Husband to Wife was $1,000,000. Therefore, the taxable gift would be $866,000.
Assume in this case, however, that the LLC operating agreement had boiler-plate language containing restrictive provisions that are common in many closely held enterprises. These restrictive provisions may cause the LLC interest to not be considered a “present interest” in the property transferred. If the LLC interest is a “future interest” in property, no gift tax exclusion is allowed. See, for example, Hackl v. Commissioner, 335 F3d 664 (7th Cir. 2003). Consequently, Husband would have made a taxable gift of $1,000,000.
Husband would have to file a gift tax return to report the taxable gift of $1,000,000. The taxable gift would utilize all of Husband’s gift tax unified credit, or it would create current gift tax payable if any portion of the gift tax unified credit had been previously utilized. Code § 2505.
Update: As pointed out by a reader, the tax consequences may be significantly different if Husband is not a U.S. citizen and is not domiciled in the U.S.