Before the Devil Knows You’re Dead? Renunciation of U.S. Citizenship as an Estate Planning Tool

By Alexander Marino JD, LLM (US Tax) and Kevin Kirkpatrick JD, MBA, Moodys Gartner Tax Law LLP

Oscar Wilde’s characters remarked in several of the playwright’s works that “when good Americans die they go to Paris.” Wilde also made observations about taxes, but he probably was not aware that even the supposedly good Americans who make it to the City of Light are followed there—during life and after death—by the IRS.

The United States is unique among developed countries in imposing tax on its citizens no matter where in the world they live. In addition to annual income and information filing obligations during life, U.S. citizens are subject to estate and gift taxes on their worldwide assets. And U.S. taxes are not something that goes away at the passing of a U.S. citizen: under U.S. law, an estate executor can be liable for the decedent’s unfulfilled U.S. tax obligations even if the executor otherwise had minimal contacts with the United States. We have seen a number of non-U.S. executors unpleasantly surprised to find out that they must not only deal with taxes in the decedent’s country of residence but also with the IRS.

For many U.S. citizens abroad, a pragmatic solution to their U.S. tax problems is renouncing U.S. citizenship. Our firm annually represents about 1 in 10 of these individuals worldwide. Most do not renounce out of any particular animosity toward the United States or even necessarily to save tax dollars. Indeed, many have U.S. friends and family who they regularly visit; more than a few are “snowbirds” who continue after renunciation to spend winters in states like Florida, Arizona, California, and Hawaii; and most come from countries where taxes are actually higher than in the United States.

In our experience renouncers tend to be individuals who are well-settled in another country, who consider themselves more at home there than in the United States, and who are looking to simplify their financial affairs for both themselves and their loved ones. Some are “accidental Americans” who happened to be born in the United States or to an American parent abroad. Others have ended up spending most of their lives elsewhere and have naturalized as citizens of another country. For all, some combination of complex U.S. information-reporting laws, potential for double taxation, stiff noncompliance penalties, increased enforcement actions through non-U.S. banks, the requirement to file annual U.S. tax returns even when no tax is owed, and the specter of the ever-changing U.S. estate tax becomes enough to recommend giving up citizenship.

Some U.S. expat groups continue to lobby to change the taxation regime for U.S. citizens abroad, but no one knows when or whether such proposals will become law. In the most serious attempt in many years, several U.S. lawmakers attempted to end citizenship-based taxation as part of U.S. tax reform bills in late 2017, but this measure was ultimately rejected by Congress. Our role as lawyers thus continues to be to help those who choose to renounce shed their U.S. status with the most favorable tax and immigration outcomes possible. Indeed, renouncing is deceptively simple: just showing up at a U.S. embassy or consulate and handing in a passport can have disastrous results. Renunciation without considering the U.S. exit tax can result in an unexpected and very large bill from the IRS, along with an inability to re-enter the United States. Thoughtful planning is instead required, as is sometimes a voluntary disclosure through an IRS amnesty program for previous non-filing of U.S. taxes.

One of the greatest benefits that renunciation provides is certainty, including with respect to the U.S. estate tax. Under current U.S. law, U.S. citizens are allowed a “basic exclusion amount” that effectively exempts the first $11.4 million USD of their worldwide assets from the federal estate tax. Citizens who die in 2019 with a net worth below this threshold pay no estate tax, while citizens who dies with assets above that are taxed at about 40% of the value of the amount above $11.4 million USD. The unified credit exclusion amount is the highest it has ever been historically, and it is scheduled to “sunset” and return to about $5.5 million USD in 2025. The amount is set by Congress and the President, so it is subject to the winds of political change. As recently as 2008, for example, the exclusion amount was $2 million USD and the tax rate was 45% of the value of assets above that amount. Individuals who renounce correctly are only subject to the U.S. estate tax on any U.S. assets (if any) that they own at death. Thus, in addition to aiding with ease of estate administration, renunciation can provide assurance that the United States will not tax the worldwide assets of a U.S. citizen at death.

While he did not coin the phrase, Wilde as a native Dubliner almost certainly knew the Irish saying “May you be in heaven a full half-hour before the devil knows you're dead.” For many U.S. citizens abroad, renunciation can be a tool not just of minimizing tax exposure, but also of ensuring that their affairs with the IRS are sorted well before death.


Alexander Marino

Alexander Marino

Moodys Gartner Tax Law LLP, Calgary, Edmonton, Canaday
T: +1 780 784 2501
E: This email address is being protected from spambots. You need JavaScript enabled to view it.; W: www.moodysgartner.com

Moodys Gartner Tax Law™ has one single focus: tax. They provide tax advisory and planning for individuals with personal and business interests on either side of the Canada-US border, no matter where they live in the world.

Alexander Marino JD, LLM (US Tax) is Director, US Tax Law of Moodys Gartner and co-leads the US Tax Practice Group. He is well-known as a thoughtful, long-term thinker. He takes the time to research the best solutions, lay out optimum plans, and then stays on top of those plans to ensure they still work when things change.
Kevin Kirkpatrick

Kevin Kirkpatrick

Moodys Gartner Tax Law LLP, Calgary, Edmonton, Canada
T: +1 780 784 2501
E: This email address is being protected from spambots. You need JavaScript enabled to view it.; W: www.moodysgartner.com

Moodys Gartner Tax Law™ has one single focus: tax. They provide tax advisory and planning for individuals with personal and business interests on either side of the Canada-US border, no matter where they live in the world.

Kevin Kirkpatrick JD, MBA, is US Tax Lawyer, Barrister and Solicitor. With a background in cross border tax law and accounting, his forward thinking approach allows him to analyse the intricacies of the law and the tax code, and simplify the often overwhelming situation for his clients.


Published: April 2019 l Photo: alexmillos - stock.adobe.com

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