US Estate Tax Guide for Non-Residents

The United States imposes an estate or succession tax on the transfer of specific US situs assets owned by a person on death, even if the person was neither a citizen nor a resident of the United States at death (aka a non-domiciliary).

US situs assets owned at the decedent’s death that are subject to US estate tax include:

• US real estate
• Tangible property physically located in the United States such as automobiles, furnishings, jewelry, etc. (cash and currency are considered tangible personal property and will be taxable if located in the United States)
• Certain intangible property, such as stock of corporations organized in or under US law, even if the deceased held the certificates abroad
• Debt obligations of a US person (e.g. bonds or other debt instruments issued by US companies),
• Qualified retirement plans held in the United States
• A US trade or business, and bank accounts used in connection with a US trade or business

Computing the US estate tax requires that the representative of the deceased determine the total value of the US situs assets held at the date of death. An asset’s value is its fair market value on the date of death rather than its value when acquired.

An exemption of only $60,000 is available against the value of US situs assets includable in the US taxable estate of a non-domiciliary individual. If the value of the individual’s US situs assets exceeds $60,000 at death, the estate’s representative must file Form 706-NA United States Estate (and Generation-Skipping Transfer) Tax Return with the US Internal Revenue Service (IRS). Form 706-NA is used to compute the US estate tax liability of the decedent’s estate. US estate tax rates are progressive and currently range from 18% to 40%.

If the value is $60,000 or less, no Form 706-NA is required, but we are increasingly seeing financial institutions request that the representative provide a US Transfer Certificate which certifies that the decedent’s property may be transferred without liability. To obtain a Transfer Certificate from the IRS, the representative must submit an affidavit and various estate related documents, and the IRS warns that the time frame for them to process the request is six to nine months from the time the IRS receives all necessary documentation.

We note that the US has entered into a limited number of estate tax treaties (currently only 16) which may help better define domicile, modify certain situs rules, reduce or eliminate double taxation, and provide additional deductions and other tax relief.

Given that foreign direct investment into the United States has consistently increased over the past 20 years (totaling close to $5.25 trillion in 2022 per US government statistics), it is obvious why the IRS has intensified its review of foreign estates with US situs assets. Further, international financial institutions have become both attentive to US situs assets and cautious in allowing their distribution without confirmation that no US estate tax is due.

Estate planning around US assets is critical for international investors. Proper planning can reduce exposure to US estate tax and the accompanying delay in the release of the assets to the estate’s beneficiaries. Such planning frequently focuses on avoiding direct individual ownership of US situs property, but it must take into account both the US rules and the investor’s home country rules. Contact us if you have any related concerns.

Article written by Gregory Dean