The Perfect Storm – US Tax, Community Property & the Mobile International Couple  

Last week I blogged about how the US tax system can create serious tax problems for the international couple when one is a US person and the other is not.  In order to keep things simple, it is often advised that the couple hold assets separately to avoid nasty US tax complications. However, in some instances this strategy may not be enough.  Community property laws may override any such attempt to keep assets “separate” and community property laws may still impact the couple even if they move to a non-community property jurisdiction.

The perfect case to illustrate the complexity involved with mobile international couples, the US tax system and international community property regimes is illustrated by Estate of Noordin M. Charania 133 T.C. No. 7 (2009).  In that case, the couple were UK nationals (neither spouse was a US citizen or resident). In 1972, the couple was exiled from Uganda and moved to Belgium which has a community property regime. The decedent and his wife did not formally change their marital regime under the procedures prescribed by the Belgian Civil Code. At the time of the husband’s death in 2002, 250,000 shares of Citigroup stock were held in his name. The Internal Revenue Service assessed an estate tax over USD2 million.

As my readers know, shares of US stock have a US “situs” for estate tax purposes and are taxed in the estate of a deceased nonresident alien, such as Mr. Charania.  Only a very small estate tax exemption amount of US$60,000 is available for such estates of nonresidents (not the generous USD12+ million Unified Credit amount available to US citizens or “residents”). More detail on these rules at my blog post here.

The Charania estate contended that the shares were community property under Belgian law, that the wife owned one-half of the shares under those laws and therefore, that only one-half of the value of the shares should be included in the value of Mr. Charania’s US gross estate.

The court was looking at a complicated fact pattern: the couple who were UK nationals had a current marital domicile in Belgium; the original marital domicile had been in Uganda. However, under Belgium’s conflict of law rules the ownership of marital property was governed not by the original marital domicile but rather the common nationality of the spouses, which in this case, was the United Kingdom.   Applying the laws of the United Kingdom, the court concluded that the community property laws of Belgium simply did not apply.  Under English conflict of laws rules the spouses never took steps to formally change their marital rights from governance by the UK to governance under Belgian law.  As a result, the spouses’ marital rights continued to be governed by English law, which does not have a community property regime.

Lessons from Estate of Charania

The biggest lesson here is to avoid surprises by a careful examination of the facts. Tax professionals must be critically aware of the possible consequences of international legal regimes when working with their clients.  Community property issues will almost certainly arise when clients are from European or Latin American countries. Questions need to be asked!

The tax professional can start with a thorough understanding of the marital property rules in the couple’s marital domicile. This would include obtaining advice from local counsel to understand the couple’s respective property rights. The inquiry should delve into greater detail and a complete understanding of the following issues:  where the couple married, whether they entered into any form of pre-nuptial or post-nuptial agreement, the terms of the applicable marital property regime or agreement.  If the couple has relocated, advice is needed whether the new domicile will apply the prior property regime or agreement, or whether laws of the new marital domicile will apply.

As in Estate of Charania, the US tax law will generally examine the law that a court in the couple’s current marital domicile would apply.  The caution that must be exercised is that this examination may include looking into that jurisdiction’s conflict of law rules.  These are also known as a country’s private international law rules.  These private international law rules can be used to determine the law applicable to the particular case.  As in Charania, a surprising result may follow.

The couple could have avoided this tax trap with some planning.  Aside from the missed opportunity to have Belgian community property rules apply, the US shares could easily have been put into a proper structure to avoid the US estate tax and all the related problems obtaining a Federal Transfer Certificate. Need tax planning advice?  Here to help.

You can listen to a podcast about this case and the importance of proper planning when it comes to touching anything “American”; how ignorance is not bliss and how tax advisors need to be aware of many facets of their client’s case. Are you working with the right tax pro?  I hope so!   My discussion with attorney John Richardson is here. 

Posted March 16, 2023

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