U.S. Estate Tax Repeal Also Benefits Foreign Persons

Volume 58, Number 2 April 12, 2010 U.S. Estate Tax Repeal Also Benefits Foreign Persons by Leigh-Alexandra Basha and Kevin E. Packman Reprinted from Tax Notes Int l, April 12, 2010, p. 137

U.S. Estate Tax Repeal Also Benefits Foreign Persons by Leigh-Alexandra Basha and Kevin E. Packman Leigh-Alexandra Basha is a partner in Holland & Knight s Washington office and chairs the firm s International Private Client Practice. Kevin E. Packman is a partner in the firm s Miami office. Generally, persons domiciled in the United States at death (U.S. domiciliaries) are subjected to an estate tax on the value of the person s worldwide assets. Deductions and credits are available to reduce and defer the tax. Similarly, persons who are not domiciled in the United States at death, but who own United States situs property are subjected to estate tax (foreign domiciliaries). The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA 2001), which was signed into law by President George W. Bush on June 7, 2001, reduced the maximum estate tax rates (from a high of 55 percent in 2001 to a high of 45 percent in 2009) and raised the exemption amount (from $675,000 in 2001 to $3.5 million in 2009) for U.S. decedents. While foreign domiciliaries were able to benefit from the reduction in estate tax rates, they were unable to benefit from the increase in the exemption, as it remained a constant $60,000. 1 Section 1022(d)(D). Stock in the following entities does not qualify for the basis adjustments: a foreign personal company; a (Footnote continued in next column.) When enacted, EGTRRA had a sunset provision, which became effective as of January 1, 2010, providing for suspension of the estate tax in 2010 and reinstatement at 2001 levels in 2011. All domiciliaries, whether U.S. or foreign, are exempt from U.S. estate tax during 2010. Unfortunately, to benefit from the sunset provision and avoid estate tax, one has to die. While there is no estate tax in 2010, heirs will no longer be able to inherit assets and receive a full basis step-up to fair market value. Rather, they will inherit assets and have a carryover basis, but the basis is not applicable to foreign corporate stock or passive foreign investment company stock. 1 Notwithstanding, the estates of U.S. domiciliaries are entitled to $1.3 million of basis to step up the value of assets being distributed to heirs, and the estates of foreign domiciliaries with U.S. assets are limited to a $60,000 basis step-up. 2 Also, the current law providing that a transfer by a U.S. person to a foreign trust or estate is treated as a sale or exchange is expanded. EGTRRA provides that the transfer of assets from the estate of a U.S. domiciliary, whether a U.S. citizen or permanent resident, to a nonresident alien is treated as a sale of the property at its fair market value triggering gain recognition to the estate. 3 Thus, to some extent, foreign decedents and foreign heirs continue to be treated more harshly than do their U.S. counterparts. This article will provide an overview of the United States federal estate, gift, and generation-skipping transfer tax laws as they apply to foreign and international clients. Transfer Tax Overview While section 7701 defines the term U.S. resident, the definition is limited to income tax issues. The definition of resident for transfer tax purposes (that is, gift, estate, and generation-skipping transfer) is much different. A resident for transfer tax purposes is someone who is domiciled in the United States. The code does domestic international sales corporation (of a former DISC); a foreign investment company; and a PFIC unless the decedent shareholder had made a qualified electing fund election. All section references are to the Internal Revenue Code of 1986, as amended. 2 Section 1022(b)(3). 3 Section 684(a). TAX NOTES INTERNATIONAL APRIL 12, 2010 137

not use the term domicile or domiciliary, and it refers to a nondomiciliary as a nonresident not a citizen of the U.S. 4 It is possible that someone could classify as a U.S. income tax resident and be subject to tax in the U.S. on his worldwide income but be classified as a nonresident of the U.S. for transfer tax purposes. Consequently, a U.S. nonresident not a citizen is subject to U.S. transfer tax on assets with a U.S. situs. Before 2010 the code provided that a tax is hereby imposed on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States. 5 It also provided that a tax is hereby imposed on the transfer of the taxable estate...of everydecedent nonresident not a citizen of the United States. 6 Thus, estate tax would be due when a U.S. citizen or resident decedent s estate transfers assets, or a nonresident noncitizen decedent s estate transfers U.S. situs assets. The gift tax, which remains in effect, is imposed on gratuitous transfers of property by any individual who is a resident of the U.S., to the extent that the value of the property transferred exceeds the amount of the exclusions and deductions allowable. 7 The gift tax for a resident applies regardless of the situs of the property transferred. For gift tax purposes, an individual is a resident if the individual has his/her domicile in the U.S. at the time of the gift. 8 A resident decedent is one who at the time of death was domiciled in the U.S., and a nonresident decedent is one who was domiciled outside the U.S. 9 The regulations define domicile as the place a person lives, for even a brief period of time, if the person has no definite present intention of later moving from that place. Residence without the requisite intention to remain indefinitely will not suffice to constitute domicile, nor will intention to change domicile effect such a change unless accompanied by actual removal. 10 Thus, an individual must have the ability to make an informed and intelligent decision regarding his domicile. Case law demonstrates that for adults, domicile is established by physical presence in a place in connection with a certain state of mind concerning one s intent to remain there. 11 Domicile is the place to which, whenever he or she is absent, he or she has the 4 Section 2511(a). 5 Section 2001(a). 6 Section 2101(a). 7 Section 2501(a)(1). 8 Treas. reg. section 25.2501-1(b). 9 Treas. reg. section 20.01-1(b)(1) and (b)(2). 10 Treas. reg. section 20.01-1(b)(1). 11 Miss. Band of Choctaw Indians v. Holyfield, 490 U.S. 30 (1989), quoting Texas v. Florida, 306 U.S. 398 (1939). intention of returning. 12 While the determination of domicile is premised on the facts and circumstances of each individual case, there are two essential requirements: living in the U.S. and having no intention of leaving. Before 1978, employees of international organizations (such as World Bank) who were stationed in the U.S. were always considered nonresidents for estate and gift tax purposes. However, that is no longer the case, and since 1978, the residence status of such a person depends on his intent, just as it does in the case of any other foreign individual. 13 Generally the list of factors below is considered in determining domicile in estate or gift tax cases: the duration of stay in the U.S. and in other countries and the frequency of travel both between the U.S. and other countries and between places abroad; the size, cost, and nature of the decedent s houses or other dwelling places and whether those places were owned or rented; the area in which the houses and other dwelling places are located; the location of expensive and cherished personal possessions; the location of the decedent s family and close friends; the place where the decedent maintained church and club memberships; the location of the decedent s business interests; declarations of residence or intent made in visa applications for reentry permits, wills, deeds of gift, trust instruments, letters, and oral statements; and motivation, especially health, pleasure, business, and avoidance of the miseries of war or political repression. Further, it is possible that the U.S. could determine an alien to be domiciled in the U.S., and one or possibly several other countries might hold the same person to be domiciled in that country or countries. However, a review of estate and gift tax treaties must always be examined, which prevents the double taxation of individuals. Many countries, the U.S. included, permit an individual to have dual citizenship. Although very few countries tax based on citizenship (that is, the U.S. and 12 Vlandis v. Kline, 412 U.S. 441 (1973), quoting Opinion of the Attorney General of the State of Connecticut Regarding Non- Resident Tuition. 13 Elkins v. Moreno, 435 U.S. 647 (1978); Rev. Rul. 80-363, 1980-2 C.B. 249. 138 APRIL 12, 2010 TAX NOTES INTERNATIONAL

the Philippines), an individual may be an accidental American by acquiring U.S. citizenship (in addition to another) by virtue of birth. Even if that individual resides outside the U.S., the individual is subject to U.S. tax on worldwide income and will be subject to U.S. estate tax on worldwide assets. Gift Tax Rules Other than reducing the gift tax rate in 2010, EGTRRA does not affect the gift tax rules. The rules in effect before 2010 remain in effect, and non-u.s. citizens not domiciled in the United States (NRAs) are subject to U.S. gift tax only on transfers of real or tangible personal property situated in the United States, except works of art on loan for exhibition. 14 The situs rules, however, differ between the gift tax rules and estate tax rules. For example, a gift of cash on deposit in a U.S. banking institution is considered tangible personal property for gift tax purposes but not for estate tax purposes. Notwithstanding, it is important to note that a gift of currency from an NRA s U.S. bank account is classified as a gift of U.S. situs property. 15 Also, the transfer of stock in a domestic corporation is an intangible and is exempt from gift tax even if the stock certificate is physically located in the United States. 16 The same stock certificate, if owned at death by the NRA, would be subject to U.S. estate tax. NRAs are entitled to make annual exclusion gifts in the amount of $13,000 to each donee if the gifts classify as present interests. 17 An NRA is not eligible for gift splitting and does not benefit from the $1 million gift tax exemption available to those with a U.S. domicile. An NRA is allowed an unlimited marital deduction for U.S. situs property given to a U.S. citizen spouse. There is no unlimited marital deduction, however, for gifts to a non-u.s. citizen spouse. Those individuals are entitled to an annual exclusion for gifts to non-u.s. citizen spouses. The exclusion is indexed to inflation and is currently $134,000. 18 Gifts to a non-u.s. citizen spouse in excess of the marital annual exclusion cannot be transferred to a qualified domestic trust (QDOT) 19 because lifetime QDOTs are not permitted. An NRA is also entitled to the unlimited exclusion for qualified educational and medical expenses. 20 NRAs may find that 2010 is the perfect time to gift U.S. situs property, whether outright or in trust, as the gift tax rate in 2010 is reduced to 35 percent. However, in practice NRAs are unlikely to make taxable gifts because it is relatively easy to avoid exposure to U.S. gift tax. For example, the NRA may remove tangible personal property from the United States and then make a gift of the property free of tax. Similarly, an NRA may convert U.S. real property into an intangible, either by selling the property and gifting the proceeds or contributing the property to an entity (for example, a U.S. corporation or limited liability company that checks the box to be treated as a corporation) and gifting the interest in the entity. Estate Tax As stated in the introduction, foreign domiciliaries before 2010 and in 2011 are subject to U.S. estate tax only on assets situated or deemed to be situated in the U.S. at the time of their death. 21 The value of all U.S. assets deemed to be situated in the U.S. in excess of $60,000 is subject to estate tax. 22 The same rates of tax apply for all decedents, whether a U.S. domiciliary or a foreign domiciliary. 23 An unlimited marital deduction is allowed to the estate of a foreign domiciliary who leaves U.S. situs property to a surviving spouse who is a U.S. citizen, or to a non-u.s. citizen, if the property left by the decedent is transferred to a qualified domestic trust for the benefit of the surviving spouse. 24 It is advisable to review previously prepared estate plans if they include a non-u.s. citizen spouse to determine whether a formula should be used to maximize the allocation between the amount exempt from estate tax and the residue of the estate passing to the surviving spouse or to charity. This will reduce the amount passing into the QDOT. Given the tax inefficiencies of a QDOT and the administrative burden of usually having a U.S. corporate trustee or other security arrangements, some options should be discussed. For example, the individual may wish to either gift the majority of his estate to a bypass trust at death or if the individual has a high mortality risk but may survive until 2011, the individual may wish to make a lifetime taxable gift 14 Section 2104. 15 An NRA who wishes to gift cash and avoid gift tax can issue a wire from offshore to U.S. beneficiaries or withdraw cash from the U.S. account, and distribute it to U.S. beneficiaries offshore. The NRA should not send a wire from a U.S. bank either offshore or onshore, nor should the NRA issue a check on a U.S. account. 16 Section 2501(a)(2). 17 Section 2503(b). 18 Section 2523(i)(2). 19 Section 2056A. 20 Section 2503(e). 21 Section 2103. 22 Section 2102(b). 23 Sections 2001(c), 2101. 24 Section 2056(d)(2)(A). If the surviving spouse was a U.S. resident at all times following the decedent s death, and becomes a citizen before the decedent s estate tax return is filed, there is no need for the QDOT, and an unlimited marital deduction is available. Section 2056(d)(4). TAX NOTES INTERNATIONAL APRIL 12, 2010 139

25 Section 2210(b)(1). 26 Section 2210(b)(2). 27 Section 1022(a)(2). 28 Treas. reg. section 20.2104-2(a)(2). at the rate of 35 percent rather than waiting for an estate tax at a 55 percent rate. If the first spouse died before January 1, 2010, and established a QDOT for the benefit of the decedent s non-u.s. citizen surviving spouse, then the QDOT tax (which is imposed on distributions of principal to the spouse or at the surviving spouse s subsequent death) will apply to distributions to the surviving spouse before his death if the distributions are made on or before December 31, 2020. 25 Thus, for distributions to the surviving spouse, the QDOT tax on distributions continues to apply for 11 years after the estate tax is repealed. However, the QDOT tax that applies at the surviving spouse s subsequent death does not apply if the surviving spouse dies after December 31, 2009, and presumably during the repeal year. 26 While heirs who inherit property from decedents in 2010 will receive a carryover basis, with some exceptions to step up the basis, the basis of property acquired from a decedent will be the lesser of the decedent s adjusted basis or the fair market value of the property on the decedent s death. 27 Consequently, the basis of property can be stepped down. Determining whether an asset is deemed to be situated in the U.S. is not always clear cut. For example, amounts a foreign domiciliary owns at the time of death on deposit with a U.S. bank or savings and loan institution or credit union are not subject to U.S. estate tax. Similarly, life insurance proceeds on a foreign domiciliary s life are excluded from estate tax. What follows is a detailed summary of assets and property with a U.S. situs. Real property is deemed to have its situs in the place where it is physically located. 28 Any real property the foreign domiciliary owns in the U.S., or an interest in a U.S. entity owning real property in the U.S., is deemed real property. However, if the foreign domiciliary owns stock in a foreign corporation owning U.S. real property, the property will be exempt from U.S. estate tax. Depending on the value of the property, the foreign domiciliary may wish to consider converting the real property situated in the U.S. to a non-u.s. situs asset. This may be done by holding the property in a foreign corporation or through some other entity structure using partnerships or LLCs. If the real estate is subject to a recourse debt, the gross estate will only include the net equity of the real estate. For example, if the U.S. real estate was valued at $10 million and contained recourse debt of $5 million, the foreign domiciliary s gross estate would value the real estate at the full $10 million. The foreign domiciliary s estate would be entitled to a deduction for a portion of the recourse debt. The portion that would be allowed as a deduction is a fraction consisting of the following fraction: The numerator is the value of the foreign domiciliary s U.S. situs assets, and the denominator is the value of the foreign domiciliary s worldwide assets. Thus, if the foreign domiciliary had a gross estate of $50 million, inclusive of the U.S. real estate, one-fifth ($10 million/$50 million) of the $5 million recourse debt, or $1 million, would be available as a deduction. Therefore, the foreign domiciliary s estate is entitled to a deduction for $1 million on the $10 million included in the gross estate, even though the foreign domiciliary only had equity of $5 million in the real estate. The situs of tangible personal property is determined by its physical location at the time of the foreign domiciliary s death or at the time the gift is made. 29 Tangible personal property physically located in the U.S. includes cash, jewelry, or personal property stored in a U.S. safe deposit box rented by a foreign domiciliary and is includable in his gross estate. A coin collection located in the U.S. will qualify as U.S. tangible personal property and have a U.S. situs. Works of art owned by foreign domiciliaries are not included in a foreign domiciliary s estate if brought into the U.S. solely for exhibition purposes or loaned to a public gallery or museum for exhibition purposes or are in the process of being shipped to such a museum or gallery at time of the foreign domiciliary s death. 30 If the intangible personal property is issued by, or enforceable against, a U.S. resident, it has a U.S. situs. Excluding portfolio debt, debt obligations of U.S. persons or of the United States, any state, any state political subdivision, or the District of Columbia, or any agency or instrumentality of any such governmental unit constitutes property within the United States. Unless an exception applies, if a foreign domiciliary owns such a debt obligation, it will be subject to U.S. estate tax, regardless of where the actual debt instrument is held, with exceptions. U.S. bank deposits with a U.S. bank, savings and loan institution, and credit union are deemed to be situated outside the U.S. if the income from the deposits would be exempt from U.S. income tax under section 871(i)(1). This generally includes all bank deposits, except when the interest earned 29 Treas. reg. sections 20.2104-1(a)(2) and 20.2105-1(a)(2). 30 Section 2105(c). 140 APRIL 12, 2010 TAX NOTES INTERNATIONAL

is effectively connected with a U.S. trade or business. 31 If the funds are held (i) by a U.S. bank in a custodial capacity or (ii) at U.S. brokerage firms or other financial institutions that are not considered banks, they are not exempt from U.S. estate tax. A certificate of deposit held in a brokerage account is also exempt from estate tax. Deposits held with the foreign branch of a U.S. corporation or a partnership engaged in the commercial banking business are deemed to have a situs outside the U.S. 32 Debt obligations owned by a foreign domiciliary, which include bonds, debentures, and notes issued after July 18, 1984, are exempt from U.S. estate tax if the interest on the obligations would qualify as portfolio interest. 33 Portfolio interest does not include interest paid on a registered obligation, including a U.S. Treasury instrument that has a maturity (at issue) of no more than one year. Thus, the debt obligations held by a foreign domiciliary at his death would be subject to U.S. estate tax. Debt issued by a corporation, the gross income of which constitutes at least 80 percent from foreignsource income, will not be deemed situated in the U.S. 34 U.S. administered retirement plans (for example, 401(k)s and IRAs) because they are generally thought to be treated similarly to debt regardless of the underlying investments are deemed situated in the U.S. Proceeds from a life insurance policy issued by a U.S. insurance company on the life of a foreign domiciliary insured are deemed property situated outside the U.S. 35 However, if a foreign domiciliary owns a life insurance policy issued by a U.S. insurance company on the life of another person and the foreign domiciliary predeceased the insured, the cash value of the policy would be included in the foreign domiciliary s estate. Stock in U.S. corporations is deemed to be sitused in the U.S. 36 Consequently, a foreign domiciliary with a stock porfolio consisting of any U.S. securities will be subject to estate tax, even if the portfolio is held in a foreign institution. Interests in partnerships are not listed in either section 2104 (situated within the United States) or section 2105 (situated outside the United States). Moreover, there are no cases that address the application of either sections 2104 or 2105 to partnership interests, and there are no administrative rulings on the point. Consequently, there is little authoritative guidance, other than commentary, on the issue of partnership situs. Thus, there is some uncertainty how such an interest will be treated for U.S. gift or estate tax purposes. 37 However, generally if a partnership dissolves at the death of one of its partners, or if it does not qualify as a separate entity, the partner s interest for estate tax purposes is his share of the underlying partnership assets situated or deemed situated in the United States. However, if the partnership is a separate legal entity and survives the death of a partner under local law, the situs may be determined either (i) by reference to the domicile of the deceased partner; or (ii) by reference to where the business of the partnership is conducted. The same situs rules should apply to a foreign domiciliary s interest in an LLC if it is treated as a passthrough entity. Any property over which the decedent made a transfer, by trust or otherwise, within the meaning of sections 2035 to 2038, inclusive, is deemed to be situated in the U.S. if the property is situated in the U.S. at the time of the transfer or at the time of the decedent s death. 38 Generally, for a trust interest to be includable in a foreign domiciliary s estate for U.S. estate tax purposes, two requirements must be met: (i) the trust must be a valid trust on the decedent s date of death; and (ii) the interest must be indefeasibly vested in the decedent such that it would have been included in the gross estate of a U.S. citizen or domiciliary under sections 2033-2046. Moreover, trust property will be included in the gross estate of a foreign domiciliary if the decedent held a general power of appointment at death as a beneficiary of U.S. situs trust property. If the foreign domiciliary is the grantor and beneficiary of a revocable living trust, the trust is disregarded for situs purposes and the character of the underlying assets remains the same. The foreign domiciliary is entitled to elect treaty benefits, provided an estate tax treaty exists. The situs of property held inside a brokerage account is determined separately on an asset-byasset basis. Again, bank accounts that are general deposit accounts held with a U.S. bank (or foreign branch of a U.S. bank) are deemed situated outside the U.S. 39 31 Section 2105(b)(1). 32 Section 2105(b)(2). 33 Section 2105(b)(3). 34 Section 2104. 35 Section 2105(a). 36 Section 2104(a). 37 See Robert C. Lawrence III, International Tax & Estate Planning, pp. 3-16-3-18, for a discussion regarding the situs of interests in partnerships and LLCs. 38 Section 2104(b). 39 Section 2105(b). TAX NOTES INTERNATIONAL APRIL 12, 2010 141

U.S. Situs Property Stock in U.S. corporation U.S. debt obligations (including retirement accounts, 401(k)s) U.S. real property interests (USRPI) U.S. brokerage accounts and mutual funds except for underlying assets that are non-u.s. situs Generation-Skipping Transfer Tax Asset Situs Chart Stock in foreign corporations Non-U.S. Situs Property U.S. bank deposits including foreign branch of U.S. corporations or partnerships in commercial banking business Portfolio debt obligations Tangible personal property in U.S. (cash) Certain works of art (Most) life insurance proceeds CDs Asset Subject to U.S. Gift Tax (U.S. Situs) Subject to U.S. Estate Tax (U.S. Situs) Annuities No Yes Currency in U.S. safe deposit box Yes Yes Cash deposit in bank (including checking, Yes No savings account, CDs) Debt No Yes, except portfolio debt obligations Intangible property No Yes, if enforceable against a U.S. person Life insurance (U.S.) on life of insured No No Life insurance (U.S.) on life of another No Yes Life insurance cash surrender value No Yes Mortgage No Yes Partnership LLC interest Depends Depends Tangible personal property Yes, if in U.S. unless on loan for exhibition Yes, if located in U.S. unless on loan for exhibition Retirement plan benefits (U.S. plans) No Yes Stock in U.S. corporations No Yes Foreign domiciliaries before 2010 and in 2011 are subject to a generation-skipping transfer tax on inter vivos transfers and transfers at death to a beneficiary who is more than one generation younger than the transferor unless a gift or estate tax is imposed on an individual in the intervening generation. 40 The GSTT is triggered by taxable distributions, taxable terminations, and direct skips. In 2011 the amount of GSTT is a flat 55 percent of the taxable amount. 41 For application of the GSTT to a foreign domiciliary, the property must be situated in the United States. 42 GSTT will apply to gifts and estates if they are otherwise subject to U.S. gift or estate tax. Thus, to the extent a transfer falls outside of the U.S. gift and estate tax net, it will not be subject to the GSTT even if it otherwise would be a generation-skipping transfer. The exemption for non-u.s. citizens, non-u.s. domiciliaries is also the same as it is for U.S. persons. 43 If a transfer, whether by gift or devise, is not subject to gift or estate tax, it will also be exempt from the GSTT. 44 The secretary has the authority to regulate the application of the GSTT to transferors who are foreign domiciliaries. 45 Determination of whether someone is a foreign domiciliary for generation-skipping transfer purposes is the same as it is for estate and gift tax purposes (that 40 Section 261. 41 Sections 2001(c), 2602, 2641. 42 Treas. reg. section 26.2663-2(b). 43 Treas. reg. sections 26.2632-1, 26.2663-2(a). 44 Treas. reg. section 26.2663-2(b). 45 Section 2663(2). 142 APRIL 12, 2010 TAX NOTES INTERNATIONAL

is, based on domicile). Every foreign domiciliary is allowed the same generation-skipping transfer exemption as a U.S. person. Although the GSTT was suspended as of January 1, 2010, a $1 million exemption will be reinstated on January 1, 2011. The GSTT applies to the following transfers by foreign domiciliaries: at death to the extent that the transferred property is a U.S. situs and is subject to the estate tax; and during life to the extent that transferred property is a U.S. situs and is subject to the gift tax. 46 Whether the skip person is a U.S. citizen or resident is irrelevant. Exit Tax for Expatriates The Heroes Earnings Assistance and Relief Tax Act of 2008 was signed by President Bush on June 17, 2008. Section 2801 was enacted as a result of this legislation, and it applies to covered gifts and covered bequests from covered expatriates, as defined in section 877A(g)(1). A covered gift is defined as any property acquired by gift directly or indirectly from an individual who is a covered expatriate at the time the gift is received (that is, who has not subsequently resumed U.S. tax residency as of the time of the transfer). 47 A covered bequest is defined as any property acquired directly or indirectly by reason of death from an individual who was a covered expatriate immediately before death. 48 The U.S. recipient of a gift or bequest from a covered expatriate is subject to transfer tax. 49 Given the 20 percent differential in the gift tax rate in 2010 (35 percent) and the gift and estate tax rate in 2011 (55 percent), it may make financial sense for covered expatriates with U.S. beneficiaries to make such gifts in 2010. Transfer Tax Treaties As of January 1, 2010, the United States has estate and/or gift tax treaties that remain in force with the following 16 countries: Australia (also a separate gift tax treaty); Austria (combined estate and gift tax treaty); Canada (this treaty ceased to have effect for estates of persons deceased on or after January 1, 1985; however, see the fourth protocol to the 46 Treas. reg. section 26.2663-2(b). 47 Section 2801(e)(1)(A). 48 Section 2801(e)(1)(B). 49 Section 2801(b). PRACTITIONERS CORNER Canada-U.S. income tax treaty regarding the application of estate and gift taxes and the recently enacted fifth protocol); Denmark (combined estate and gift tax treaty); Finland; France (combined estate and gift tax treaty, amended effective December 21, 2006); Germany (combined estate and gift tax treaty effective December 14, 2000); Greece; Ireland; Italy; Japan (combined estate and gift tax treaty); the Netherlands; Norway; the Republic of South Africa; Switzerland; and the United Kingdom (combined estate and gift tax treaty). Several countries with which the United States had entered into tax treaties have repealed their estate tax, including Sweden, Italy (for a time), some Swiss cantons, Austria, and Australia. Notwithstanding, all of these treaties remain in place, with the exception of Sweden. 50 This is because the estate tax was still in existence in the United States and expected to return in 2011, the gift tax provisions sometimes still applied, and the situs rules and determination of domicile were still relevant. Several of the treaties have very beneficial provisions including providing for a pro rata portion of the prerepeal applicable exclusion amount and a doubling of it for an increased marital exemption (for example, U.S. treaties with France and Canada). While it is not clear how these treaties will be interpreted in 2010, it would appear that the same interpretations should remain as was the case when the U.S. treaty parties repealed their inheritance/estate tax. Conclusion 2010 may not be quite the panacea many believe, as the repeal from estate tax does not apply unless someone dies, and then their heirs must deal with carryover basis. The gift tax remains in effect, albeit with a 10 percent savings in the tax rate. Then in 2011, the rules from 2001 resume. While many believe Congress will raise the estate tax exemption and reduce the estate tax rate, it is likely these changes will not benefit foreign domiciliaries. 50 The revocation of the Sweden-U.S. estate and gift tax treaty was effective as of January 1, 2008. TAX NOTES INTERNATIONAL APRIL 12, 2010 143