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State Of Your Personal Estate

Several weeks ago this writer was in Spain consulting with a dual citizen of both the United States and France.  Happily Mme Palu announced that in 2004 she had inherited oil stock valued at $600,000 from her mother, a citizen of the United States.  Having sold the same stock last year, Mme Palu was now investing the proceeds in Spanish property which she intends to eventually pass on to her daughter.  'Now I don't want to pay any taxes on this inheritance,' she firmly said.

According to U.S. tax law, the value of a decedent's bequest is its fair market value at the time of death.  So the price at which Mme Palu sold the stock in 2004 would have approximated its value on the open market.  Therefore, she would have experienced very little gain or loss on sale.  And since the value of mom's estate in the United States was less than the Unified Credit of $1,500,000, her estate would also have incurred no estate taxes.

However, because Internal Revenue Service defines Gross Estate as 'the value of all property in which you had an interest at the time of death,' Mme Palu's estate upon her death will have to include all of her world-wide property.  If she dies in 2005 with a world-wide estate valued at $3,000,000 after allowable deductions, IRS will assess $695,000 in estate taxes, which is just over 46 cents for every dollar after the Unified Credit is applied (3,000,000 - 1,500,000 x .4633 = 694,950).

Mme Palu will have to prepare an American Will designating her daughter as heir to her estate.  When the daughter inherits, she will be obliged to pay Spanish inheritance taxes on any property located in Spain.  The top marginal tax rate is 34% on estates valued above €797,555 plus €199,291 in taxes from the lower marginal rates.  In France, the inheritance tax is paid by inheritors of the estate of a French resident or the French assets of a non-French resident.  Therefore, as long as Mme Palu does not reside in France or owns no property in her native country, her daughter will owe no inheritance taxes there (the top rate of which is 40% of estates exceeding €1,700,000 in value).

Like Spain, Portugal applies inheritance taxes only on property located within its borders.  But expatriated Brits who have not acted to establish a new domicile outside their home country can be liable to 40% tax against the value of their world-wide estate above £263,000.  Internal Revenue Service will allow as credit any inheritance taxes paid to a foreign country.

Mme Palu, who was a bit astonished at the complexities of inheritance tax laws, will probably maintain property only in the U.S. and Spain in order to avoid too much confusion.  If she does some estate planning, she can protect her estate from being eroded by inheritance taxes.

'One more thing,' Mme Palu added.  'My mother gifted me the stock just before she died.  She acquired the stock from her husband's estate when he passed away in 1965.'  OH DEAR!!  IRS has this to say about that:  To figure the basis of property you (mme Palu) receives as a gift, you must know its cost basis to the donor (Mme Palu's mother) before it was given to you.

After some discussion, we estimated that original basis to be $50,000.  Therefore, Mme Palu will pay capital gains taxes on $550,000 ($600,000 - $50,000).  Why, oh why, didn't her mom speak with a U.S. tax specialist?  She died within two months of gifting her stock.