Inheritance tax and US gift tax are similar but not identical taxes. The first is a tax on what a person owns at death (the estate). The tax is paid by the estate after death. The second tax applies to all donations of property made during a person’s lifetime and if they are paid by the person making the donation (the donor). In principle, gift tax applies to transfers of property that would otherwise have been part of the estate and would be subject to death tax.

The wealth tax and gift tax are conceptually a unified tax. There is an exemption amount ($ 5.4 million for Americans and $ 60,000 for nonresident aliens). When (I) the sum of the taxable gifts for life, or (ii) the amount of the gifts taxable for life + the taxable equity, exceeds the amount of the exemption, the tax is owed.

Given the policy of preventing a person from giving away assets before death to avoid estate tax, one would think that the definition of what is subject to the two taxes would be identical, to avoid manipulative tax planning. Is this really the case? Not for non-US citizens residing outside the US! And here the fun begins for us tax freaks.

For these people, what are the main types of property subject to inheritance tax?

– US real estate

– Tangible personal property located in the US at the time of death

– Stocks and bonds issued by a US entity.

For those people, what are the main types of property subject to gift tax?

– US Real Estate

– Tangible personal property located in the US at the time of the gift.

Given the differences in definitions, it seems like it would be possible for a person to simply give away their US stocks and bonds before they died. The gift itself would not be subject to US gift tax.In addition, when the donor passes away, these stocks and bonds will no longer be his, thus avoiding US inheritance tax as well.

Why this apparent loophole, which does not make sense from a policy point of view? Well, as they say, the legislative process and hot dog making are two things you don’t want to take a close look at. The historical reasons for this political inconsistency are not pretty.

But, for the benefit of tax experts, the above solution, of course, is not that simple for two main reasons:

1. The landlord’s problem is that the people who receive the gift of US stocks and bonds are still subject to wealth tax should they die from owning these assets. And if the value of stocks and bonds is substantial, added to the fact that the recipient does not know that he is going to die, this solution is not optimal. There are much better solutions.

2. The biggest problem is that any gift made before death is ignored for estate tax purposes, unless specific conditions are met. In other words, unless certain conditions are met, if a person gives away the stocks and bonds without careful planning, the gift will be ignored, included in the estate, and subject to inheritance tax.

What is the “anticipation of death”? And what are the conditions that must be met to avoid the return of the gift to the donor’s estate? Very good question.

Both the “anticipation of death” provision and the conditions to avoid including donated property in taxable estate are not subjective tests where the donor can simply say “He / she did not intend to donate due to death” . Tests and conditions are objective tests that must be carefully met for both the gift to be tax-free and for the assets to avoid estate tax.