United States

*Updated July 2020*

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• Legal system
• Inheritance and succession
• Estate planning
• Taxation
• Residence and domicile
• Other relevant information

Legal system

Common law. Federal government has specific, enumerated powers under the Constitution of the United States. States retain powers not enumerated. State legal systems are also common law, with the exception of Louisiana’s civil-law system, with some common-law influences.

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Inheritance and succession

Succession

State law generally provides for testamentary freedom although testator cannot completely disinherit spouse. Property not disposed of by will or non-probate arrangement, passes by intestacy. Every state has a statutory regime identifying heirs entitled to, and respective shares of, intestate property. 

Family law and defined inheritance rules

State law generally does not provide children with fixed inheritance rights in the deceased parent’s property (except Louisiana, where certain children are entitled to forced share), except in cases of intestacy. Any child may be disinherited as long as the testator has clearly expressed intent to do so and the entire estate is left to others.

State law generally protects spouses by restricting the ability to transfer property during lifetime and at death. Many states give the surviving spouse a right to an elective share of the deceased spouse’s estate calculated on the value of both real and personal property. If the spouse dies testate, the surviving spouse may choose between the testamentary share and statutory elective share. To guard against inter vivos transfers and property held in trust decreasing the estate, many states subject certain non-probate assets to elective share provisions.


Nine states have community property laws stipulating that property acquired during marriage, other than by gift or inheritance, is owned equally by each spouse. At death, the surviving spouse owns a one-half interest outright, irrespective of any testamentary disposition.

Probate process

The probate process is initiated in the county of the decedent’s legal residence at death. Rules regarding who may present the will and how it must be proved differ from state to state. Most states require wills to be in writing and signed at the end by the testator, who must be of legal age and sound mind at the time of making the will. Most state laws require the testator’s signature to be witnessed by at least two witnesses. Many states allow for self-proving wills (with affidavits signed by notary, testator and witnesses) that can be admitted to probate without witnesses testifying in court. 

Mental capacity

The testator must be of sound mind at the time the will is executed. Mental capacity required to make a will is lower than that required for other acts, such as making a contract. The testator must know that they are making a will, the natural objects of their bounty and the nature, extent and value of their property. 

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Estate planning

Use of trusts in estate planning

A trust is created under the laws of a particular state, which determine construction and administration, as well as validity. Trusts can be used in estate planning as non-probate arrangements and may be created inter vivos, taking effect immediately, or testamentary, taking effect on the testator’s death. The creation of private trusts follows common-law principles. The settlor conveys legal title to a trustee and equitable title to the beneficiaries.
 

Use of foundations in estate planning

An entity known as a foundation can be used in estate planning to support charitable activities. Foundations can be established during life or by will as a non-profit corporation or charitable trust. 

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Taxation

Income tax system

The US has a worldwide income tax system. State and local governments may also tax individuals, corporations and trusts.

• Individuals: US citizens and non-citizens resident in the US are subject to income tax on worldwide income. Non-resident aliens are subject to tax only on US-source income, with certain exceptions.
• Corporations: US corporations are subject to tax on net worldwide income at graduated corporate tax rates. Foreign corporations are subject to tax on investment income from US sources and income effectively connected to a US trade or business.
• Trusts: Settlor of a grantor trust remains liable for tax on trust income. Domestic non-grantor trusts are subject to federal income tax on worldwide income at the same tax rates as individual taxpayers, although the highest income tax rate applies to a lower taxable income threshold.


Foreign non-grantor trusts are subject to tax only on certain income and gains derived from US sources, collected by means of withholding tax, or on income effectively connected with a US trade or business. 


Income of a domestic non-grantor trust is taxable to the trust or its beneficiaries, but not both. The trust is taxable on capital gains and accumulated ordinary income. Trust beneficiaries are taxable on income distributed to them. Income taxed to trust is treated as addition to corpus and not taxed when distributed.


US beneficiaries who receive distributions from foreign non-grantor trusts of income and gain accumulated by the trust in a prior year are subject to a special tax regime, known as the throwback tax, which attempts to tax the beneficiary as if they had been taxed on the accumulation distribution in the years when the income was earned by the trust. The beneficiary’s tax rate, amount of accumulation distribution, and tax years to which tax is applied are all determined by a complicated formula.

Personal income tax rates

For regular income tax purposes, a system of graduated marginal tax rates is applied to taxable income. Tax rates discussed here and below are federal rates for 2020 (absent tax reform). 

• Top income tax bracket: 37 per cent for single filers with incomes above USD518,400 and married couples filing jointly with incomes exceeding USD622,050.
• Tax rate for qualified dividends: 20 per cent for single filers with incomes above USD441,450 and married couples filing jointly with incomes exceeding USD496,600.
• Net investment income tax: 3.8 per cent on net investment income, which includes capital gains, for taxpayers whose modified adjusted gross income exceeds USD200,000 (single filers) and USD250,000 (married filing jointly).

Corporate income tax rates

Beginning with tax year 2018, the effective corporate income tax rate is a flat 21 per cent due to the passage of the Tax Cuts and Jobs Act of 2017 (the TCJA). State and local taxes and rules vary by jurisdiction. 

Capital gains tax

Short-term capital gains are taxed at ordinary income tax rates. Tax on long-term gains from selling collectibles (e.g. coins, art) can be as high as 28 per cent. The tax rate for individuals on long-term capital gains (held for over one year) is 20 per cent for single filers with incomes above USD441,450 and married couples filing jointly with incomes exceeding USD496,600. 

Non-residents taxable on

Non-residents subject to federal income tax only on US-source income, including:

• Fixed and determinable income of a periodic nature not effectively connected with a US trade or business, such as most passive dividend and royalty income, subject to withholding tax on gross amount paid.
• Interest income paid by US borrowers subject to withholding tax, with the exception of portfolio interest paid on certain debt issued by US corporations and interest paid on deposits with US banks.
• Capital gains realised on sale or exchange of US capital assets (for example, US corporate stock) is exempt from federal income tax, with the exception of gain from sale or exchange of US real property interests (including interests in US corporations owning US real estate).
• Income effectively connected with the conduct of a US trade or business, reduced by allowable deductions, subject to federal income tax in the same manner as US residents or citizens.

Withholding tax rate (non-treaty)

US payers of dividends, interest, rents, royalties etcetera collect a 30 per cent flat rate of withholding tax. Withholding tax is collected on a gross basis, without deductions. There is also a withholding regime for real property transactions under the Foreign Investment in Real Property Tax Act (FIRPTA), pursuant to which the purchaser withholds 10 per cent of the amount realised (sale or contract price) when the seller is a non-US person, except foreign investors owning 10 per cent or less of a publicly traded real estate investment trust who are exempt from FIRPTA taxation on stock sales or capital gain dividends. FATCA imposes a separate withholding penalty on certain US-source withholdable payments made to foreign financial institutions (FFIs). FFIs can include ‘investment entities’ which may be trusts or holding companies. To avoid withholding, non-US entities must be able to supply a FATCA certificate with their US withholding tax status and their FATCA status.

Withholding tax rate (treaty)

Income tax treaties frequently reduce or eliminate withholding tax on interest and royalties, and reduce the withholding tax rate on dividends, anywhere from 5 to 20 per cent depending on the country and type of income. Treaties usually require foreign taxpayers to have a US permanent establishment (i.e. fixed office or other place of business) before the government will tax business income. 

Taxation at death

Worldwide estates of US citizens and domiciliaries are subject to federal estate tax. An estate tax credit exempts some amount from tax. A charitable deduction is available for bequests to qualifying domestic or foreign charities. A marital deduction is available for bequests to a US-citizen spouse. If the surviving spouse is not a US citizen, the property must pass to a qualified domestic trust (QDOT) to qualify for the marital deduction, even if the spouse is US resident, which defers estate tax until the surviving spouse’s death.

From 2013, the top estate and gift tax rate is 40 per cent. Beginning with tax year 2018, the TCJA doubled the estate tax exemption amount to USD10 million (indexed for post-2011 inflation, bringing the exemption amount to USD11.58 million for estates of decedents dying in 2020), to the extent not used to offset gift tax on lifetime transfers. This exclusion amount is set to expire on 31 December 2025, after which date the exemption will revert to the USD5 million exclusion amount (plus cost-of-living adjustments) provided under prior law. Estate assets (other than income in respect of a decedent) receive a step-up in basis to fair market value as of date of death for income tax purposes. In 2019, the IRS issued final regulations confirming that individuals who make gifts in 2018 and 2025 will not be adversely impacted after 2025 by any reduction in the exclusion amount.

Other taxes

Gift tax: transfers of property (whether real property, tangibles or intangibles, and wherever located) by US citizens and domiciliaries are subject to federal gift tax. A small annual exclusion is provided for gifts of less than USD15,000 for tax year 2020, per donee. US donors may double the exclusion amount by filing a gift tax return and electing to split gifts with the donor’s spouse. A gift tax credit exempts some amount from gift tax. Charitable deduction is available for gifts to qualifying domestic or foreign charities (income tax deduction is available only for gifts to domestic charities). An unlimited marital deduction is available for gifts to a US-citizen spouse while tax-free gifts to a non-citizen spouse are limited to USD157,000 for tax year 2020.

Generation-skipping transfer (GST) tax: Federal GST tax is a flat rate equal to the highest estate tax rate (40 per cent as of 2013). It is imposed on certain transfers to persons two or more generations below that of the transferor (a skip person), whether such transfer is made during life or at death, and is in addition to any gift or estate tax. An exemption of USD11.58 million (for tax year 2020) is available to shelter total GST gifts and bequests.

Tax treaties

The US has estate tax, gift tax, or estate and gift tax treaties with 17 countries. The US currently has income tax treaties in effect with more than 60 countries.

Tax information exchange agreements (TIEAs)

The US has entered into more than 30 TIEAs.

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Residence and domicile

Special rules on becoming resident

For income tax purposes, two tests determine residence: the green card test and the substantial presence test. Under the green card test, a lawful permanent resident for immigration purposes (green card holder) is conclusively resident for income tax purposes upon entering the US on the green card.


Under the substantial presence test, an individual who regularly conducts business or otherwise maintains a physical US presence, even if the permanent home is outside the US, will acquire income tax residency. The substantial presence test consists of two separate and alternative tests: the 183-day test and the three-year formula test.


The 183-day test provides that a person physically present in the US for at least 183 days in a given calendar year, and who does not qualify for student, teacher, diplomat or other exempt status, will be resident for income tax purposes, unless a treaty tie-breaker provision applies.


Under the three-year formula test, a person is US resident if physically present in the US for at least 31 days in the current year and 183 days over a three-year period, taking into account each day of physical presence in the current year, one-third of the days of physical presence in the first preceding year, and one-sixth of the days of physical presence in the second preceding year. Income tax residency can be avoided only if the individual qualifies for a treaty tie-breaker exception or closer connection/tax home exception.


Special rules on ceasing residence or expatriating

Anti-avoidance rules apply to prevent taxpayers who have been resident in the US for at least three years from avoiding tax on non-recurring US-source capital gains by temporarily abandoning resident status in the year the gain is recognised and then becoming resident again within three years. US citizens and long-term residents (US resident in at least eight of prior 15 years) who meet specified income or net-worth tests are subject to an expatriation tax upon relinquishing their citizenship or residency, pursuant to which all property of such a covered expatriate is deemed sold for its fair market value on the day before the expatriation date.

Domicile concept for gifts and inheritance

For gift and estate tax purposes, residence means domicile. An individual acquires domicile in the US when physically present with the intention to reside in the US permanently. Domicile, unlike income tax residency, is based on facts and circumstances in all cases. Domicile is presumed to continue in the foreign jurisdiction until it is established in the US. 

Taxation of holdings by non-residents on death and of gifts

• Gifts: Transfers of intangibles by non-citizens not domiciled in the US at the time of the transfer (and not subject to US expatriation tax rules) are not subject to federal gift or GST tax, even if US property (e.g. stock in a US company). Thus, only real property and tangible personal property located in the US are subject to federal gift tax (at the same rates as for US citizens and domiciliaries) when transferred by a non-citizen not domiciled in the US, with limitations on credits, exclusions and deductions.
• Death: For non-citizens not domiciled in the US at death, US-situs property such as US real estate and US company stock, tangible property physically located in the US, and certain securities or obligations issued by US persons, are subject to federal estate tax. In addition, certain transfers of US-situs property, by trust or otherwise, will be included in the decedent’s taxable estate if such property is situated in the US either at the time of transfer or at death. Among other assets, US bank accounts and debt securities issued by US persons are generally not subject to federal estate tax. Federal estate tax rates are the same for non-citizens not domiciled in the US, but the estate tax credit for such persons exempts only USD60,000 from tax. Deductions available to the estate of a non-citizen decedent not domiciled in the US are limited.

Reporting/auditing requirements

US reporting requirements are extensive. In addition to income, gift and estate tax returns, taxpayers must file specific forms to report gifts and bequests from non-US persons exceeding USD100,000 in any calendar year; distributions of any amount received, directly or indirectly, from a foreign trust; direct and indirect transfers to foreign trusts, including transfers at death; ownership, directly or through a trust, of more than 10 per cent of a foreign corporation; financial interest in or signature authority over a foreign bank or financial account; interests in specified foreign financial assets for any year in which the aggregate value of such assets is greater than specified reporting thresholds. US limited liability companies (LLCs) that are wholly owned by non-US persons report transactions between the LLC and its foreign owner and related parties. Each form has specified due dates and penalties for failure to file.

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Other relevant information

Asset protection laws

Federal law governing bankruptcy and retirement plans exempt certain assets from creditors. State law also protects certain assets from creditors. In addition, states have laws protecting owners of corporations, limited partnerships, and LLCs from the entity’s liabilities. State law provides some protection for the assets of a trust from a beneficiary’s creditors. Some states allow asset protection for a self-settled trust and some states do not.

Foreign currency restrictions

There are no restrictions on the amount of currency or other monetary instruments transported into or out of the US but amounts exceeding USD10,000 (or foreign equivalent) must be reported. Only US currency is to be used for purchasing items within the US.

Foreign ownership restrictions

Generally, there are no foreign ownership restrictions. Certain federal statutes require information gathering and disclosure. In addition, certain industries affecting national security may have limits on foreign investment.

AML/due diligence and other requirements and regulatory procedures for advisors

Pursuant to the 2001 Patriot Act, the Treasury Department requires the filing of suspicious activity reports and has set minimum standards for financial institutions to verify customer identity. Financial institutions have established due diligence policies, procedures and controls reasonably designed to detect and report instances of money laundering. Financial Crimes Enforcement Network (FinCEN) due diligence rules require certain US financial institutions to gather information on beneficial owners of entity account holders. FinCEN also requires certain title insurance companies to identify natural persons behind companies paying all cash for high-end residential properties in cities with money laundering vulnerability such as Manhattan and Miami.

Key resources for further information

• Internal Revenue Code of 1986, as amended: uscode.house.gov/browse/[email protected] title26&edition=prelim
• IRS forms and guidance: www.irs.gov
• FATCA FFI List search and download tool: http://apps.irs.gov/app/fatcaFfiList/flu.jsf
• American Bar Association Section of Real Property, Trust and Estate Law: www.americanbar.org/groups/real_property_trust_estate/resources.html
• State departments of taxation, for example: www.tax.state.ny.us
• State bar associations, for example: www.nysba.org
• American College of Trust and Estate Counsel: www.actec.org
• Uniform Law Commissioners: www.nccusl.org

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STEP branches in the United States

We currently have 17 STEP branches and chapters in the US.

• STEP Boston
• STEP Chicago
• STEP Gold Coast Florida
• STEP Long Island
• STEP Los Angeles
• STEP Miami
• STEP Mid-Atlantic
• STEP Nevada
• STEP New York
• STEP Orange County
• STEP San Diego
• STEP San Francisco
• STEP Seattle
• STEP Silicon Valley
• STEP Southwest Florida
• STEP Texas
• STEP Wyoming

Firms in the United States

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Members in the United States

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