Estate planning for US Citizens living in Ireland
When it comes to US citizens planning to become residents in Ireland, there are important matters to address concerning their personal wealth and structured wealth held in trust structures. To ensure their wealth is held in a suitable manner on both sides of the Atlantic, US citizens should plan carefully before or upon becoming Irish tax residents.
Rules for Taxing Personal Wealth: Remittance Basis for Income and Capital Gains Tax
Did you know that the US has a unique approach to taxation based on citizenship? Unlike many other jurisdictions, US citizens are subject to taxes based on their citizenship status. In contrast, Ireland's tax system is primarily determined by factors such as tax residence and domicile. Let's explore these differences in more detail!
If you're an Irish resident with a US domicile, you can benefit from the remittance basis of taxation for Irish tax purposes when it comes to income and gains from outside of Ireland. Essentially, this means that you'll only have to pay tax on non-Irish income and gains when you bring the income and gains into Ireland.
Ireland has a specific tax system for gains made on regulated funds based in certain countries. These countries include EU, EEA, and OECD jurisdictions, including the US. If you're invested in certain US regulated funds (like certain US mutual funds), you'll be subject to a higher income tax rate of 40% instead of the usual capital gains tax rate of 33%. This means that if you're a resident of Ireland but domiciled in the US, you may have to pay Irish tax at the rate of 41% on gains made from certain US mutual fund investments.
The US-Ireland tax treaty does not cover gift taxes in Ireland. However, if a US citizen living in Ireland maintains their domicile in a US state, they would only be subject to Irish gift tax if they have lived in Ireland for the previous five consecutive years for tax purposes.
Explore US tax complexities when investing abroad, with specific concerns around Passive Foreign Investment Companies (PFICs) and US controlled foreign company (CFC) rules. To mitigate any adverse consequences, it is crucial to review investment portfolios and structures before entering Ireland. Seek US tax advice for a well-informed approach.
Inheritance Tax and Gift Taxes
There is a significant tax treaty between the US and Ireland that directly impacts federal estate tax in the US and inheritance tax in Ireland. This treaty holds power to override specific Irish domestic inheritance tax regulations under certain circumstances.
If you're a US citizen living in Ireland but still considered a resident of a US state, you won't have to pay Irish inheritance tax on any assets you have outside of Ireland. This includes cash in non-Irish bank accounts, non-Irish securities, stocks, and shares. This exemption applies as long as you pass away while being a tax resident of Ireland.
If you're a US citizen living in Ireland but not officially domiciled there, you won't have to pay Irish inheritance tax when you receive assets located outside of Ireland from a deceased individual who was domiciled in a US state.
If a US citizen is married to an Irish citizen, it's important to note that the Irish citizen spouse won't be eligible for the unlimited marital deduction for federal estate tax upon the death of the US citizen spouse. Additionally, if the total worldwide estate exceeds the federal exemption threshold, federal estate tax may apply to any property received by the Irish citizen spouse.
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Revocable Living Trusts
Revocable living trusts in the US are commonly used for domestic estate planning. In Ireland, these trusts are generally treated as transparent for tax purposes if the settlor has capacity. This means that the settlor is personally taxed on any income and gains, similar to a nominee arrangement. If the settlor is not a tax resident in Ireland and there are no Irish assets in the trust, there should be no Irish tax liability. However, if the settlor is an Irish tax resident, they may be able to apply the remittance basis of taxation for non-Irish income and gains, subject to certain exclusions. The specific gift tax consequences discussed in relation to Personally Held Wealth should also apply.
It's important to note that when a revocable living trust becomes irrevocable upon the settlor's death, it will be treated as a settlement for Irish tax purposes. If the trustees of the trust are resident in Ireland and the trust is considered an Irish resident trust, they may be subject to Irish income tax and capital gains tax. This is especially relevant for US citizens who have a revocable living trust or serve as trustees before becoming Irish tax residents.
If a trust remains a non-Irish resident trust after becoming irrevocable, it must take into account specific Irish tax anti-avoidance provisions. These provisions apply to offshore structures, such as non-Irish tax resident trust structures, and attribute income and gains to Irish resident individuals. It is important to consider these provisions, as they may result in the income and gains of the trust being taxed on an Irish resident beneficiary or settlor, regardless of whether they receive value from the trust. Limited defences may be available, but careful consideration is necessary.
If you have an irrevocable trust that was set up and fully funded by someone who is not a resident of Ireland before December 1st, 1999, and it does not involve any property in Ireland, you will not be subject to Irish gift and inheritance tax.
What should you do?
US citizens residing in Ireland need a well-coordinated approach to their estate planning. Our team has expertise in navigating international tax issues and working with global advisors to provide comprehensive solutions for our clients. It's crucial to seek advice early on to address any potential issues from both US and Irish tax perspectives.