Question 1: What is an Internal Revenue Service (IRS) transfer certificate?
Answer 1: In the case of a nonresident decedent, IRS Regulation section 20.6325-1(a) specifically defines a transfer certificate as “a certificate permitting the transfer of property of a nonresident decedent without liability.”
Question 2: What is the liability?
Answer 2: Generally, it is United States federal estate tax liability described in summary fashion below.
In the case of a United States citizen–
The value of the worldwide gross estate of a United States citizen (whether residing in or outside the United States at date of death), less allowable deductions, is subject to United States federal estate taxation. Allowable deductions may include, for example, certain funeral expenses. In calculating any federal estate tax due, the “tentative tax,” computed in accordance with Internal Revenue Code (IRC) section 2001, is reduced by a credit equal to the federal estate tax imposed on a “basic exclusion amount,” indexed for inflation. For estates of decedents dying in calendar year 2017, the basic exclusion amount is $5,490,000 (i.e., $5,000,000 indexed for inflation), and the credit (referred to as the “applicable credit amount” or “unified credit”) is $2,141,800. The maximum estate tax rate is 40%.
Are you confused? Let’s use a mathematical calculation to illustrate.
At date of his death, a United States citizen owns stock and mutual funds valued at 6,000,000 United States dollars. Assuming no deductions, the United States federal estate tax liability is calculated as follows:
| Gross estate | $6,000,000 |
| Deductions | ($0) |
| Taxable estate | $6,000,000 |
| “Tentative tax” computed per IRC §2001 | $2,345,800 |
| Unified credit computed per IRC §2001 | ($2,141,800) |
| Estate tax due | $204,000 |
In the case of a nonresident non-US citizen—
The value of the taxable estate of a nonresident non-US citizen decedent is limited to the value of property deemed situated in the United States, less allowable deductions (many of which are subject to a pro-rata calculation under IRC section 2106). The unified credit is $13,000, the federal estate tax imposed on an exclusion amount of $60,000. As in the estate of a United States citizen, the maximum estate tax rate is 40%.
Let’s again use a mathematical calculation to illustrate.
At date of his death, a nonresident non-US citizen owns United States stock and mutual funds valued at 300,000 United States dollars. Assuming no deductions, the United States federal estate tax liability is calculated as follows:
| Gross estate | $300,000 |
| Deductions | ($0) |
| Taxable estate | $300,000 |
| “Tentative tax” computed per IRC §2001 | $ 87,800 |
| Unified credit computed per IRC §2001 | ($13,000) |
| Estate tax due | $74,800 |
Thus, in the case of the estate of a United States citizen, tax may be due on the value of the gross estate in excess of $5,000,000 (indexed for inflation), $5,490,000 in year 2017. In the case of the estate of a nonresident non-US citizen, tax may be due on the value of the gross estate, situated in the United States, in excess of $60,000. Generally, if the tax is not paid in either case, the unpaid tax becomes a lien on the decedent’s gross estate for ten years from date of death. The transfer certificate effectively allows for the release of the estate tax lien.
Question 3: Why does a brokerage firm or financial institution require an IRS transfer certificate before transferring inherited assets to the intended beneficiary or surviving joint tenant of a brokerage or financial account?
Answer 3: An individual, whether or not a United States citizen, residing outside the United States, may pass away with United States assets, including but not limited to stock and mutual funds. These assets may or may not be held in joint tenancy. As I stated in a published article entitled, “The Federal Estate Tax Lien and Nonresident Decedents: What’s a statutory executor to do?” [TRUSTS & ESTATES, November 2014; also available at http://www.wealthmanagement.com/estate-planning/federal-estate-tax-lien-and-nonresident-decedents], financial institutions, holding these assets, may have United States federal estate tax compliance responsibilities and liability as a statutory executor under IRC section 2203. The IRS transfer certificate permits the transfer of the assets of a nonresident decedent to the account beneficiary or surviving joint tenant without the financial institution incurring liability. The account beneficiary or the surviving joint tenant also is protected as explained below.
Question 4: Is it necessary for me, as an account beneficiary or a surviving joint tenant, to secure a transfer certificate from the IRS if the brokerage firm or financial institution fails to raise the issue?
Answer 4: As an account beneficiary or a surviving joint tenant, you also may constitute a statutory executor under IRC section 2203 and, therefore, have compliance responsibilities and estate tax liability. For example, if the financial institution transfers the assets to you as an account beneficiary before the issuance of the transfer certificate, any unpaid taxes generally will continue to be a lien on the transferred assets for ten years from the original account owner’s date of death. A transfer of the assets by the financial institution does not release the lien on the assets. Instead, the transfer certificate, received from the IRS, effectively allows for the release of the estate tax lien. Accordingly, securing a transfer certificate from the IRS may be necessary and prudent, regardless of whether the financial institution deems it necessary. But see Answer 6 (Situation B).
Questions 5: If no tax is due, do I, as an account beneficiary or a surviving joint tenant, continue to have compliance responsibilities? Is a transfer certificate also necessary?
Answer 5: As an account beneficiary or surviving joint tenant, you may continue to have compliance responsibilities, i.e., filing a United States federal estate tax return, regardless of whether estate tax is ultimately due. In the case of the estate of a United States citizen, a United States federal estate tax return must be filed if the value of the gross estate exceeds $5,000,000 (indexed for inflation), $5,490,000 in year 2017. In the case of the estate of a nonresident non-US citizen, a United State federal estate tax return must be filed if the value of the gross estate exceeds $60,000. Despite return filing requirements, no United States federal estate tax may be due because, for example, you took a certain deduction or deductions, you took a foreign tax credit or you elected a treaty benefit.
Recall a transfer certificate from the IRS permits the transfer of property of a nonresident decedent without liability. A United States federal estate tax return showing no tax due is not a transfer certificate. In fact, the IRS must review the return to determine whether any tax is due and whether a transfer certificate can be issued. As stated in IRS Regulation section 20.6325-1(c), the IRS will issue a transfer certificate “when [it] is satisfied that the tax imposed upon the estate, if any, has been fully discharged or provided for.” The tax is considered fully discharged “only when investigation has been completed and payment of the tax, including any deficiency finally determined, has been made.” Thus, a transfer certificate from the IRS may continue to be a necessary and prudent measure to protect oneself from liability.
Question 6: When may a transfer certificate not be necessary?
Answer 6: There are situations in which a transfer certificate may not be necessary.
Situation A: One situation is with respect to the transfer of property that is being administered by a United States executor or administrator.
NOTE: Although a United States executor or administrator may be appointed to administer property passing under a Will, the institution or individual in actual or constructive possession of non-probate property of a nonresident decedent may want to secure a transfer certificate from the IRS before transfer of the non-probate property in its possession to protect itself from possible estate tax liability.
The following examples illustrate the difference between property passing under a Will (probate property) and non-probate property and the importance of the distinction in determining whether a transfer certificate may be required.
Example i: A nonresident drafts a Will leaving his brokerage account to his nephew. A United States executor is appointed to administer the brokerage account passing under the Will [probate property]. Under these limited facts, no transfer certificate is required before the transfer of the brokerage account to the nephew.
Example ii: A nonresident drafts a Will leaving those of his United States stock certificates, not held in a brokerage account, to his nephew. The nonresident also completes a brokerage account beneficiary designation form naming his nephew as the beneficiary of the brokerage account. As a consequence, the brokerage account will not pass under the Will. A United States executor is appointed to administer the United States stock certificates passing under the Will [probate property]. Under these limited facts, a transfer certificate is required before the transfer of the beneficiary designated brokerage account [non-probate property] to the nephew. No transfer certificate is necessary before the transfer of the United States stock certificates not held in the brokerage account.
Situation B: Another situation is limited to the case of the estate of a nonresident non-US citizen. Specifically, IRS Regulation section 20.6325-1(b)(3) provides an exception whereby, instead of a transfer certificate, the custodian, having “no information to the contrary,” can rely on a statement of facts showing no taxable estate, from “the executor or other responsible person who may be reasonably regarded as in possession of the pertinent facts.” To reiterate, this exception does not apply in the estate of a nonresident United States citizen.
NOTE: In order to rely on a “statement of facts” instead of a transfer certificate, the regulation also imposes a high degree of responsibility on the custodian to determine whether no tax is due.
Question 7: What are the IRS requirements to secure a transfer certificate?
Answer 7: Web-based instructions, available at https://www.irs.gov/businesses/small-businesses-self-employed/transfer-certificate-filing-requirements-for-us-citizens and at https://www.irs.gov/businesses/small-businesses-self-employed/transfer-certificate-filing-requirements-for-non-u-s-citizens, identify the necessary documentation and/or return filings in the cases of a nonresident estate of a United States citizen and of a nonresident non-US citizen, respectively.
Question 8: Is the transfer certificate limited to assets held in a financial institution?
Answer 8: No. It may apply to other assets including United States real estate.
That is the topic of another blog dealing with real estate transactions.