Hello, and welcome. So this is the 3rd part in the estate and gift tax series videos. So first video, I discussed the estate tax provisions. The second video, I discussed the gift tax provisions. And now this is the video where did we discuss strategies where how we can legally, avoid or reduce the estate and gift tax impact, especially for NRIs who are returning back to India.
Right? So let us start. Again, also, disclaimer that it’s a very complex topic, one of the most kind of complex topic that even for whatever videos that I’ve made on this channel, this is, I think, one of the most kind of complex and require a lot of time for me to do the research and everything, but I’m not an estate attorney. So please consult a proper estate attorney, for your situation. And my request is that first you watch the videos on estate and gift tax provisions because unless and until you have a hold on the provisions, the video this video will not you know, you’ll it will go as a bouncer.
You’ll not be able to get it certain points that I’m making here. So first, watch the video on estate tax. 2nd, watch the video on gift tax, then come to this video. Right? And when you are watching the video, this requires some careful attention.
So maybe you can watch it where you are not kind of distracted or and you can just devote your full attention because this is a very, very complex topic. Okay. Now this video, basically, I will be covering strategy pointers. Right? Pointers on the individual strategies.
The discussion I will not be able to go deep into any one particular strategy, right, because of the time constraints that we have for an individual video. What I will do is that after this video, depending upon the important, the the strategies, I will try to cover it in detail on a stand alone level. Right? Okay. Now the strategies differ.
Right? Because the provisions are different. Right? Provisions are different for US citizen resident and non citizen, non resident. So the strategies are also different.
My focus in this video is the non citizen, non resident cases because this is where there is a very lower threshold of 60,000. For a US citizen resident, the threshold is 13,610,000. Right? That’s a really big amount and, you know, less cost for for a worry, but this is where the 60,000 thing people are not even aware that this is the estate tax liability that they they can incur. Right?
So that is this is where we have I’m I’ll be focusing the most part of the video. Now important thing, regardless of whatever you do, see, friends, we don’t think about our death. This is a topic why you know, it’s a topic where I don’t want to think about my death, something happening to me. But when that happens, right, the the the the the mental load that comes on the spouse, the wife, especially, right, on handling the entire thing, the paperwork and everything, and it’s it’s really, really difficult because I’ve seen that very closely. Right?
So my point is that please also focus so we think a lot about investment planning, where to invest, what are the returns. Please please please have a estate plan for both your US and the Indian investments. Right? Now now because of the different succession laws, US you need, kind of, different plan for a US investment and different plan for an Indian investment. Please contact the respective professionals who are experts in the field.
Get your estate plan in place, and please pay attention to this. Right? It’s just not that, you know, we only focus on the investment. Don’t think about what can happen if I’m not alive. Right?
How will my wife be able to process everything? Right? Do all the paperwork and everything. Right? Now share your investment details with spouse on her email.
Maybe have a record somewhere that she can access after your death, and also include her in discussion. I’ve so I have a lot of discussions with especially returning NRIs coming back to India. There are few people, like, maybe I will say 1 or 2 out of 10 people who get their spouse also in the discussion. This is so important. At least have her in the discussion so that she also knows what’s the plan, where are we going, where are the investments.
At least she she knows for a fact that, okay, these are the investments we have. Right? Also, have an updated contact list of professionals, like a CA in India or a CPA in US or a state attorney in US. Those you should have a handy list, maybe an Excel sheet where you build all these names, their addresses, their numbers so that she can contact them. Right?
So this is just apart from whatever we are going to discuss, but this is, like, the base. Okay. Now please understand. Because this is a muddy, the definition of resident is muddy for estate and gift tax purposes, it’s not the definition as per the income US income tax law. Therefore, especially for cases where, like, an Indian goes to the US and then stays sometime, maybe in whichever visa, and then comes back.
Right? Even a green card here is not relevant. You may have a green card. Now green card has a strong presumption of being a resident, but it’s all facts and circumstances dependent. So wherever you feel that, you know, there is somewhere that you you you may be on the wrong side of the law, better to take professional advice because here in this field, for income tax purposes, it’s very clear.
GC, citizen GC or substantial presence test, which is based on the number of days to stay. Very clear. Here it is not that clear so it’s based on facts and circumstances so please take proper professional advice you don’t want to be in the wrong on the wrong side of the law right okay Now now let’s come to the strategies for US citizens and residents. I will not spend much time here. Right?
Because they have a very big amount threshold. So both so if both spouses are US citizen and or resident, there’s a very high threshold of 13.61 like we discussed in the estate tax video, and, also, there is an unlimited marital deduction for survivals surviving spouse. Right? So I’ll not go deep into the provisions now in the for this for this video because of both these things, very high threshold, unlimited marital deduction, so almost no cost over you unless you are, like, a super rich because then you’ll have lot of, you know, high profile advisers also, attorneys also advising you. But, so this is, you know, out of the question because of the limit.
However, please understand that under the Tax Cuts and Jobs Act, this limit actually, this this act had come in 2017 when Trump was there as the president. Now this has a sunset clause of 2025, where December 31, 2025, this limit will become again half, which reverts back to the 5,000,000. Right? So please pay attention to that, maybe, if it is relevant to you. It may revert, so this depending upon the elections and everything.
Okay. Now in case of death of spouse in case of death of spouse, it is always advisable even if your estate is below the below the threshold of 13.61 to file a 706 maker DSUE election even if the assets are below so that those the the unused portion of the or the exclusion that can be that can get automatically transferred in a tax free way to the surviving spouse. Right? Now issue comes. If you are a USC, spouse is a non USC.
Now in that case, lifetime gift, if you do that, that’s not a problem. Right? Within the lifetime. But in case of death, there is no marital deduction because please understand here the psyche of the US government. They don’t want on your death assets to go to a non citizen spouse.
Right? Anyone who is non citizen. So this may be considered as a kind of a discrimination also. This is how the provision is. Spouse is a non citizen.
No marital deduction on death. That means any transfer to the spouse in case of death will be a problem. You cannot claim the unlimited marital exclusion. In that case, you should take help of Qdot, qualified domestic trust, where decedent, that means you, transfer your assets even within your lifetime to a QDT. Right?
And surviving spouse is the beneficiary, the spouse is a beneficiary, and she can get the income from the trust. There are certain limitations under the trust. It’s like a whole topic to be discussed in detail. Please check with your attorney, and if you feel that this is one way you can, I mean, for a non if the spouse is a non citizen, you can skip the state tax provisions legally? Please do it.
It’s a it’s a very recognized way of doing it. Right? Now even if you die and the survive the spouse surviving spouse is there, she can also do this election. Before filing the return, she can make that kind of election. There’s a provision in the estate tax law where she can make that election, and then in the form 706, she can make that, she can create that trust, and then she can make that election in 706.
Even that is allowed. So even after your death, this this this kind of a strategy can be done to escape the the tax implications. Okay. Now, combination of US insurance now. Again, one strategy that attorneys use in what I had came across in my research is that a mix of US life insurance, and QDOT.
Right? And when you take US life insurance, the thus, how to structure it is that, I take the insurance. If something happens to me, the payout is if something happens, I take it on the name of me and my wife. So payment payout happens if something happens to my me, and after that, even my wife and then the beneficiaries get, and then there is a QDOT. So there is a it’s kind of a it’s like a combo of US Life Insurance and QDOT.
Right? So please explore it in detail because this is one of the ways attorneys use to kind of plan around estate tax. Okay. Purchase of insurance in US for estate and administrative costs impact and now or what you can do is that have a a kind of insurance that you purchase in US for the estate tax aspect. If you are very rich and you know?
So so if the assets are going beyond, so you purchase kind of insurance to take care of the estate tax impact. And because the estate tax because the insurance for a US citizen, the insurance policy proceeds form part of the estate, so so to avoid that, you generally put it in in an Irrevocable Life Insurance Trust, ILIT, so that it doesn’t form part of the of your estate. The insurance itself doesn’t form part of the estate at the time of the day. So this is again a pointer. Right?
So I’m just giving you pointers. You can do further research on this. Speak to your, state attorney. They will have more insights in these matters. So this is on US citizens and residents.
Now let us come to the main thing about strategies for non citizen, non resident. Now please understand. The limit is very low. No matter how much money that you have accumulated in US, anything above $60,000 will have a straight 18 to 40% tax on the value of the asset. Understand this.
It’s not the profit or the income as a component. It’s the value. So a good chunk of your hard earned wealth in US over, like, 10, 15, 20 years that you’ve worked in US and you’re coming back to India, that can wipe out in a second if you come to India and die after that without having planned your estate in US. Right? So it requires a very thoughtful consideration by both spouses because it requires decisions with respect to your investments, selling see, what our mindset is.
When we want to invest, we have money and we want to invest. We don’t think about tomorrow as to the estate tax and all these things. We just go ahead and buy a, you know, house and all these things. But when it’s time to return back to India and we have not got a US citizenship or a a green card or you know? Then it becomes all these issues then start, you know, crop cropping.
So it requires a very careful decision both by both spouses, and please get professional advice wherever necessary. Pay some amount. Get proper advice rather than just learning from here and there on the Internet and all. No. It’s a very, very complex decision to take.
Right? So better have a professional by your side, a proper estate attorney who guides you. Now plan to planning to start, like, planning to what to do with the investments should start before you move move out from the US. Right? It’s not that you move out from the US and then you think that, oh, I should have set up a qdot or I I should have done this and that.
No. No. No. It should start well before in fact, what I will say, it should even for every decision to invest, you should think before, you know, investing. So I always see, definitely, one thing is very clear.
Given the IRS, it’s so you know, the US regulations are so complex that one is that IRS penalizes you for having non US investments by so many reporting obligations, by the FTC issues and everything. So my view is very clear that till you are a US resident, always, always, always invest in US. Right? However, they also have this thing called estate tax. That means when you are moving out of US and you should forget, they’ll levy a they will, you know, take a, you know, big piece of the cake.
The IRS will take a big piece of the cake. So very important to decide while investing. It may be a conscious decision that, okay, I’ll invest in US only till my stay in US to avoid the PFIC and all these problems. But at the time of moving, you should be careful that to take the necessary steps to, reduce your estate tax exposure. Strong reason has to be there for you to hold US Citus property.
US basically, Citus is located property US property, US assets, not only real estate, but any assets above the estate tax threshold of 60,000 in US. So when you are returning to India and you have assets in US above $60,000, every asset, every dollar, you should have a very strong reason why you are keeping in the US. To some for some people, it is they want to move back to US at a later date. 2nd, they have USD denominated goals for which they need. Some people have this presumption that USD will always remain stronger, so I want to give the money to in USD, which I don’t agree.
It can be it can go either way. No one can predict the India US currency movement 10, 15, 20 years down the line. Right? So whatever you have, you have to have a strong reason. Right?
Okay. Now let’s come to the easiest and the, you know, kind of a no brainer strategy. Liquidate US Citus assets above 60,000 towards the end of the US residency or as early as possible after coming to India, preferably within r north period in India. Right? So when you come back after a long, like, 10 to 15 years stay in US, you generally get 2 years kind of where India will not ask you about your foreign income.
India will not ask for any reporting. Any tax will not apply any tax. This is your golden 2 year window where you can decide. But I will suggest take a decision before the end of the US before before leaving US itself. Because even after you move within r naught period, if something happens to you, there’ll be a estate tax risk that will be there, right, for every day that you are there in India.
So, ideally, have it before leaving US only plan and do certain actions to liquidate those assets. Of course, you’ll need to think about the US tax implications on assets if they are standing at a gain. So what will be the capital gain and other things that you have to take into account? When you talk about 60,000 so some people, they keep till 60,000, and then they, kind of above that, they liquidate. But please understand, anything above 60,000 can trigger the tax.
Right? So if your portfolio is 60,000, and then it will appreciate, it becomes 65,000, so the tax liability will get triggered. So you may want to keep it, like, 50,000 or something like that. That even if it appreciates, it doesn’t cross the 60,000 threshold. K.
Moving money back to India, I will make you a separate video on this that a lot of questions, are there on the tax implications of moving money between countries. See, if you just move the money to India, there is the remittance is not taxable in India. Right? There’s the the the remittance per se is not taxable. Right?
If you take a credit of the income directly in an Indian bank account, India will tax it irrespective of your, residential status. But if you just move money from a US bank account to an Indian bank account, remittance is not taxable. However, please maintain source of funds documentation because you take the money into any Indian bank account, even in an RFC. India can question the source of funds for the for the money. So you have to have the documentation that this money was earned.
They this and this are genuine money, so you should have your tax returns, your w two, your employment contracts. Sorry. Everything you need to keep. Right? Okay.
So now when you move money to India, there are 2 choices. 1 is that if you if you have a NRO account, you can move to an NRO account. And if you don’t have a NRO account, once you come back to India, become a resident, you can open a resident account and transfer. But that money will be then Indian money. It it will have restrictions on repatriation.
Or a better option is to park it in an RFC account, which is a kind of a USD account, and the the beauty of RFC is that the money is freely reparable anywhere outside India, and it is free from the FEMA restrictions. Under the FEMA law, the law says that any money that you park in RFC, which is based off from your earnings abroad, can be repatriated outside India, and India will not question it. Right? So later on, you may want to do a start up in US or something, and you want to repatriate. If you repatriate the RFC money, there is no compliance required under the FEMA overseas investment regulations.
It’s a very complex law, so there is no compliance. So your money is practically free, whatever you want to do. You want to buy a property in Dubai, whatever you can do without the restrictions of FEMA. Because understand this, once you come back to India, you become a you come under the FEMANET, then you like, I’m an Indian resident as per FEMA. So whatever I do a cross border transaction will have its limits.
What I can do, Indian government tells me that you can do this, you cannot do this. But as regards money that is there in the RST account, there is no such problem. And, also, since the money has escaped the US, it’s not a USIT’s property, there’s no estate tax, and the money is also in the USD. Right? So that is one more benefit.
Okay. Other option. So one is that you move to a jurisdiction like India. Another is that you move to a jurisdiction like Ireland. Right?
And that is allowed under FEMSA. FEMSA section 64 allows that that if you have any genuine earnings when you were a nonresident, you can send it anywhere, reinvest it anywhere. We will not question. India will not question. Right?
So you can liquidate your US assets. For example, Vanguard, if you have funds, ETFs in Vanguard. Vanguard has similar ETFs in Ireland. Absolutely similar in, ETFs holding the US stocks, but the investment is there in Ireland. Right?
So, again, now this is a strategy that is used by lot of people. Please check with your attorney. This is a strategy that is used for, escaping the US estate tax that moving the investments from to liquidating them and then moving them and buying them in the Ireland domiciled, funds. So why Vanguard is there and others maybe also there. Or you can move your money to a low tax jurisdiction like UAE.
Now UAE also has very, very friendly laws. There is a full Dubai International, the family wealth center is there, and, you know, they have specific regulations on family foundations. And, also, if you’re a high net worth kind of an individual, you can also explore UAE as a jurisdiction. And, they are also regulated under the, I think, the common law, not the Sharia law. So those friendly regulations are also there.
But please check the host country’s requirements and the India taxation reporting everything. Pay attention to currency aspects. Now why currency aspect? Because if you want to keep the money in US for whatever reason and the expense you are going to incur will be in INR, maybe for your retirement, there will be a currency risk. Or it’s the reverse that just because you want to escape the state tax, you move the money into INR or maybe in any other currency, and the you know that the expense will have to be incurred in USD, to that extent, there’ll be currency risk.
So you’ll have to be okay with it. It’s a conscious decision you’ll have to take. Okay. Don’t liquidate anything everything. Now when I talk about liquidating, I’m not saying that make it 0.
Keep some amount in US Bank account or move when you’re moving to India, keep some amount parked in the RSC account. As I told you, it is excluded from FEMA purview, FEMA regulations under section 64, because that amount you can use free from FEMA restrictions anywhere later outside India. Now before moving from the US, and this is what I see in portfolios of lot of people, they have lot of 401ks spread with various employers, so they have not yet consolidated. So always, first, consolidate your investments into a traditional IRA. Right?
Consult because that will help you because, anyways, this is a very complex topic. So first, you consult. So if you have, like, your kind of investments with different brokerages, at least before prior to moving, have it in 1 brokerage or one bank or you know, so that it it’s easier to transact. Now when you talk about with, liquidating, there are restrictions. Like, for example, 401 k, there are so in certain cases restrictions.
For example, you are moving to the Indian arm of the US employer, where there is a restriction that you cannot withdraw. Right? So that you’ll have to live with. You cannot do anything. Right?
Then there are penalties, like, 401 k or traditional IRA. If you withdraw, then there is a 10% additional tax that you’ll have to pay. Right? Then, if you withdraw within RNOR in India, no problem. But after RNOR, India will also have there’ll be tax implications.
So all that you need to kind of study for each of the investments and then take a decision. Maybe an Excel sheet you can list on the investments and what are the tax applicable tax. You sit with a professional, discuss, and then make a plan of action. Okay. This I will do for this.
This I will do for this. The best course of action considering US income tax, India income tax, US estate tax, Indian FIMA regulations. So it’s a complex cocktail of all these regulations which come in play. Okay. Now another one option is that you move your existing US investments to securities that don’t fall in the definition of USITUS assets for estate or gift tax.
So please refer to my video on estate tax, right, where certain like, there are certain portfolio bonds, there are certain deposits, by the US Bank. Right? Bank deposits, they don’t fall. Right? So you may want to kind of keep your money in that.
Right? Or maybe life insurance in US, because for a non citizen, nonresident, life insurance policies in US is not. But, again, check the charges and everything. Check the investment returns that you will get. Right?
That is, again, one strategy you can do. Okay. Sorry. Then okay. One thing.
If this is a topic that bothers you and you have significant US investments, please try to obtain a US citizenship for self and spouse ASAP because if you and your spouse become US citizens, then the matter ends there. Right? Then you don’t have to take care of all these aspects because the threshold for a US citizen is 13,600,000, so it’s very high. However, if after becoming US so once you become a US citizen, then you are you are basically ready yourself to the US tax system and for life till you renounce the citizenship. And then matters become complex when you return back to India.
Right? Because then there will be certain foreign reporting requirements and all those things. I made a separate video on US citizen returning back to India, US citizen or green card holder. You can check that. So just take a conscious decision.
If you want to keep most of the assets in US, best if you can get a US citizenship. If maybe you can get, then that’s the best thing. It can kind of escape you from these problems. If your spouse is a US citizen, you are in luck because then you can claim unlimited marital deduction for transfer within life or at death, so no worry on that account. If your spouse is a non US citizen, very good option to create a QDOT, qualified domestic trust.
Put the assets in the QDOT and, get the tax deferral of the extra tax liability. In case of your death, the election can be made in form 706. Your wife can get the assets without any estate tax liability. So that is a very good option and highly recommended option. If you want to keep assets back in US, like a property, house, and then you don’t want to sell it, so that’s an option.
Okay. Now another strategy is gifting. Now gifting on US property. When I say property, it is anything, money, shares, house, whatever, US assets to a non such as a non resident spouse up to 1.8 lakh 85 lakhs per year you can gift without even re reporting it under form 709, and that spouse can then invest the funds in India or keep in an RSC account in India. So what is happening here and you can give to an Indian resident close relative up to $18,000 per year.
Now what here it happens is there is no reporting requirement under form 709. Right? The money doesn’t go towards reducing your, e 60,000 exemption. Right? The spouse can then invest or you give to an Indian resident close relative.
Right? Now issue here is that, one is that you need to keep in mind the Indian clubbing provisions because you are gifting without adequate consideration to your spouse who is investing the funds in India. So if if she invests, then the income from those investments may still be clubbed in your Indian tax returns. So just check on that. Right?
2nd is giving gifts to Indian resident close relatives. It may have succession planning kind of issues succession issues because you lose the ownership of that money. Tomorrow, if there’s a dispute or something, Right? So don’t blindly use this kind of strategy. You lose your right of this kind of these funds just to save on the estate tax.
Please think on that. So keep in mind the Indian tax, FEMA, succession related considerations while gifting, when you gift, there has to be a proper documentation. The receiver has to have the proper documentation, especially if the funds are invested in India because in that person’s return, right, that person the bank, Indian, in the financial institution will report it to the bank. They will see lot of money coming into the invested by that person, whereas there is no that much income. So you have to have enough documentation that purse to prove that it’s a genuine money, and the Indian resident, whoever you gift to, the donee, should file a tax return in India and declare that gifting schedule e I in the tax return so as to say that, okay.
I declared it as an exempt income in my tax return. Right? And when you are gifting to Indian resident, it has to be close relative only. Otherwise, it will be taxable. It’s if it’s not a closed relative under section 56 of the income tax item, it may then be taxable to the relative.
Please check state laws. So whichever state that you are living in, right, that state may also tax you even after you move back to India, especially if you qualify as a resident of that state. And that generally happens if you hold a property in that state. So that state can continue to deem yourself or if you have any income sources from that state, so state may have its rules to deem you as a resident for estate tax purposes, and the state has its own estate tax. Right?
So that also the state law you need to check, especially if you have a real estate ownership. Now a very good way you can plan estate tax is investment in 5 to 9 plans. So 5 to 9 plans are specified. It’s called qualified tuition plans for it’s a tax advantaged plan. Some states give the corresponding tax benefit.
Some states don’t give. Basically, states have these plans. Right? It’s for the college education of the kids. So when you invest in 5 to 9 plans, what happens is that, generally, you have a kind of a gift limit of 18,000 USD per year per donor.
Here, you can, like, in one shot, you can do, like, 90,000. 90,000, and that will be ratably apportioned to 5 years. So in one shot, 90,000 goes out from your gross estate, And if you have 2 kids, you can, like, 90,000, 90,000, 1 lakh, 80,000 goes. So that’s a very good investment that you can do. Similarly, gifting, if you do, it takes a lot of money away from your estate.
Right? So you can evaluate this. Then taking out US property on loan or getting a loan against the property. Right? So either you take the property on loan because the debt is then you know, it gets reduced from the asset value.
Donating assets to a qualified charity, you can make a will where you donate certain assets to a qualified charity. So that will you can get a credit of that in your form 706na. Right? Okay. Then foreign non granted trust, now foreign blocker corporations.
Now these are advanced strategies, and this has to be done only with the help of a professional estate attorney. Please understand there are a lot of these consultants who sell you these kind of schemes. However, they can run foul of the IRS regulations and can be treated as abusive kind of instruments to escape tax, and then there’ll be penalties associated with it. So what basically is that you can put the asset into a foreign non grantor trust, or you can, like what you can do is that you can put your assets in the u US corporation. That US corporation can in turn be held by a foreign corporation, say, in UAE, and you hold ownership of the that Dubai, company, that UAE company.
Right? So, effectively, you are not holding the US assets. It the shares in the Dubai company or the UAE company are not US IPOs assets. So that way, you can try to kind of plan it around, but these are very complex strategies to be done only under advice of an independent attorney. Right?
Not the consultants who sell you anything and later than you are at the, you know, mercy of IRS for, you know, any problems. Okay. If you are purchasing a property in US knowing that you will not get a citizenship or a US green card and you’ll be returning back to India, then please explore structure like purchasing through LLC or block of operations or trust, irrevocable trust, to reduce your estate gift tax liability and also FOPTA. So if you FOPTA is foreign investment in real property act. So if you come back to India, have a property in US, and sell it, there’s a 15% withholding by the done to be done by the buyer.
To manage all that, these complex some structures are there which you can sit with your attorney and, kind of explore. Then other option is paying the education and medical expenses directly to the concerned institution that, reduces your exposure, for the threshold purpose. And this is the final thing, and this is a bonus for all those who have waited till now. Right? You do everything.
You liquidate. So first strategy is liquidate. Whatever you can liquidate without any serious implications, you can explore QDOT. You can, you know, do all these things. But if there is a still a estate tax kind of, implication that remains, for example, there is an IRA or there’s a 401 k, which you cannot the terms of the 401 k don’t allow you to sell.
So and it is above 60 k. It is like 1 lakh. There is a 4 till 40,000 see, 1 lakh minus 60,000. 40,000 is subject to 18 to 40% tax. Plus then there will be administrative costs, attorney fees, all these things are there.
So to cover that estate tax impact, you can buy a pure term life insurance in India to cover that. Right? So, see, understand, estate tax arises when you die. So when you die, the these implications arise and this outgo in terms of estate tax will arise, but at the same time, you get the proceeds from an Indian, life insurance company, and life insurance in India is not a US site use property, so that can kind of compensate, but it will not compensate for the time that it takes, the 2 year period that it takes for the entire estate to get settled. Till then your family will not get the money.
Right? So this is a strategy to cover the residual risk after you do all the above things. Okay. So this was a long video. I’ve tried to explain it from my end.
I know it’s very, very complex thing, but I’ve just tried my bit. Please do share your thoughts, feedback, on this video, and thank you so much for watching this video. Thank you so much.