Tax Transfer Certificate and Estate Taxes

Understanding a Tax Transfer Certificate

A tax transfer certificate is a document issued by the U.S. Internal Revenue Service certifying that a United States citizen who died while living abroad does not owe the federal government any estate taxes. Banks and financial services companies require an IRS tax transfer certificate before they release any of the assets held with the decedent named as an account owner.

Why Would You Need a Tax Transfer Certificate?  

Most U.S. citizens who reside in other countries keep a substantial portion of their financial assets and resources in the U.S., even when they have lived abroad for many years. If the decedent died in the United States, their estate plans might have included effective strategies to transfer assets to others without the IRS’s involvement.

For example, a joint bank account with right of survivorship would simply pass outside probate to the joint account owner instantly, by operation of law. However, when a decedent dies while residing outside the U.S., the financial institutions holding the decedent’s assets insist that they receive formal confirmation of “no estate tax due” from the IRS, even with joint accounts and similar accounts otherwise free from such requirements. U.S. financial institutions are unable to determine the value of the decedent’s holdings on their death and, therefore, cannot establish whether the value exceeds the federal estate tax exemption. If the estate value does exceed the exemption level, then assets that the banks distributed to other parties might have been owed to the IRS by the account holder’s estate.

U.S. Estate Tax Exemption Amount and Institutional Responsibility

In 2022, a decedent’s estate is exempt from federal estate taxes if its value does not exceed $12.06 million (the Basic Exclusion Amount(“BEA”). The decedent’s lifetime gifts (apart from the annual gift tax exclusion amounts (in 2022, up to $16,000 per donor to each donee) that can be gifted yearly without any tax reporting or payment requirements) to others must be included in that calculation.

The value of the estate assets exceeding that amount will be taxed at 40%. The IRS needs to be convinced that the decedent was not holding substantial financial resources overseas that were not counted in the estate tax assessment. If no such foreign-held assets exist, then the IRS will issue a tax transfer certificate authorizing U.S. banks and financial services companies to distribute the assets as they otherwise would.

Getting a Tax Transfer Certificate

Obtaining a tax transfer certificate from the IRS is a time-consuming and labor-intensive task for the attorneys and accountants you hire. First, they analyze all available financial documents to conduct a worldwide search for any assets owned by the decedent. The results of the analysis are then accurately reported to the IRS and attested to under oath. If convinced of the absence of any other taxable assets that could conceivably reach or exceed the BEA baseline, the IRS will issue the tax transfer certificate.

Solutions Not Requiring a Tax Transfer Certificate

At Ely J. Rosenzveig & Associates, our lawyers handle many cases where American citizens are living, and passing away, in Israel. Some cases involve dual citizens of Israel and the U.S. whose estates are probated in Israel. In these cases, our estate and tax lawyers are able to file an “ancillary probate” proceeding in the United States where U.S. assets will be identified and declared, and the probate court will issue a decree for U.S. banks and financial institutions to rely upon for authority. This probate court order relieves the financial companies from responsibility to the IRS.

Tax Transfer Certificate Accountant
Assets can be protected from the complex entanglement of IRS tax transfer certificates by establishing and funding a trust with the U.S. held assets.

You can avoid the entire tax transfer certification process by planning ahead with an experienced estate and trust lawyer.

Avoiding Tax Transfer Certificate Problems — Establishing a Trust 

Working with experienced lawyers who specialize their practice in estate planning, trusts, taxation, and elder law, assets can be protected from the complex entanglement of IRS tax transfer certificates by establishing and funding a trust with the U.S. held assets.

A trust is a legal instrument which is sometimes recognized as a separate entity from the donor whose assets funded it. In other instances, it is not.  These classifications all depend on the terms of the trust, and the needs for which the trust was established. Trusts can be irrevocable (generally not reversible) or revocable (still available to the trust donor), depending on the circumstances, objectives and choices the donor makes when creating the trust with their attorney.

Why Does a Trust Eliminate the Need for IRS Tax Transfer Certificates?

Earlier in this blog post, we discussed the banks’ and financial service companies’ apprehension of being responsible to the IRS for assets that they distributed without confirmation that no estate tax was due by the deceased account owner. When a trustee is named to manage and control assets owned by the trust, it is the trustee who becomes the point-person to whom the IRS will look if an estate tax issue arises.  Since there is an ‘address’ or authority to whom the IRS can turn, the financial institutions are no longer concerned with distributing assets in the aftermath of an account owner’s death – ultimately, if there are estate taxes owed, it is the trustee’s fiduciary responsibility to make sure that they are paid.

Other Common Issues for U.S. Citizens Residing Abroad

Many U.S. citizens living abroad are unaware of tax and asset reporting obligations imposed on them by the IRS and the U.S. tax code.

One of the most common errors among U.S. citizens living abroad is the failure to file a Report of Foreign Bank and Financial Accounts (FBAR’s) required by the federal Bank Secrecy Act of 1970. The law requires any U.S. citizen living abroad who has one or more foreign financial accounts with a cumulative total amount of $10,000 or more at any time during the year to report the details of any such accounts on a form FinCEN Form 114. The Foreign Account Tax Compliance Act of 2010 (“FATCA”) added reporting requirements (e.g., Form 8938) for foreign account holders with substantial assets that meet specified thresholds).

The law exempts certain accounts, such as IRAs and military personnel accounts from the FBAR foreign account reporting requirements, and it provides for joint reporting by spouses.

Anyone required to file an FBAR or FATCA report who fails to do so is subject to substantial penalties, and, if said non-compliance is deemed to be willful, the possibility of criminal prosecution.

Th attorneys at Ely J. Rosenzveig and Associates are experienced tax advocates with substantial experience in obtaining IRS tax transfer certificates, planning to circumvent the transfer certificate requirements, remedying FBAR and FATCA non-compliance issues, and negotiating with the IRS significant reductions or total abatements (waivers) of assessed penalties.  

Contact our New York office for answers to any Tax Transfer Certificate questions.

Call +1 (914) 816-2900 or email us at [email protected]

Ely J Rosenzveig
Ely Rosenzveig

Ely J. Rosenzveig practices principally in the fields of elder law, trusts & estates, tax planning, employment law, and mediation. He has extensive experience in federal and New York State tax law, and has successfully represented a wide range of clients on FBAR & FATCA compliance issues. Ely also practices employment law, with a particular emphasis on age and disability discrimination, negotiating compensation agreements, and severance issues.

With his extensive background in the law, his experience as a congregational rabbi, and his specialized training in Mediation at Harvard Law School, Ely is also available as a professional mediator to help facilitate optimal solutions in matters ranging from family and estate disputes to multi-party commercial issues.

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