Are there US Estate Tax Concerns for Non-US Persons?
Please note updates were made to the information in this post in March 2020.
The United States imposes its Estate Tax not only on its citizens and residents but also on non-residents that die owning US situs assets. So, what might be taxable? Non-resident aliens (NRAs) are taxed on certain categories of US situs assets. The following is a list of some of the most common types:
- US situs real property (Treasury Reg. 20.2104-1 (a)(2))
- Shares in US corporations (IRC 2106(a))
On the other hand, shares in a foreign corporation, even if the corporation has substantial interests and real property in the US is also not regarded as a US situs asset.
- Tangible personal property such as jewelry, cars, artworks, etc. (Treasury Regulation 20.2104-1 (a)(2))
- Interests in partnerships that do business in the US or in partnerships or trusts that own US situs assets
- Bank accounts connected to a US trade or business
However, regular US bank accounts not connected to a US trade or business are not regarded as US situs assets for estate tax purposes.
- Cash in a deposit box located in the US (IRC 2104(c))
What exemptions are available?
Having established what assets are chargeable to US estate tax, an executor must then determine their value and examine whether a filing requirement is present.
The US allows an exemption from taxation of $60,000 for the estates of NRAs. The estates of residents of a country with an Estate Tax Treaty with the US may also benefit from an increased exemption.
An unlimited exemption is available for US situs assets transferred to a US citizen spouse. If the spouse is an NRA, a special vehicle known as a Qualified Domestic Trust could be established which would allow for a deferral of the estate tax due until the death of the surviving spouse or a capital payment is made from the trust.
Charitable exemptions are available only for US registered charities and a limitation exists on the proportion of debts and administrative costs that can be applied to arrive at the net value of the estate.
What are the filing requirements?
Assuming the estate is subject to US taxation Form 706-NA is required to be filed within 9 months of the date of death. An extension effective for six months is available by filing Form 4768. Penalties and interest can be applied to late-filed returns absent reasonable cause.
What taxes are payable?
US estate tax is charged on the excess of the estate above allowable exemptions and deductions and is charged at graduated rates beginning at 18% for estates with a taxable value of between $1 and $10,000 rising to a maximum of 40% on estates with a taxable value of over $1million.
What credits/exemptions are available?
The US does not allow an NRA credit for the estate taxes paid in other countries. However, the decedent’s local jurisdiction may allow a credit for US Estate taxes paid under its local law or under an Estate Tax Treaty with the US.
Are there planning opportunities available to mitigate estate taxes?
The value offered by US equity and real estate markets in the wake of the 2008 crash in asset prices tempted many NRAs to increase their exposure to the US. Planning opportunities involving the formation of non-US corporations or the use of trusts to hold US situs assets might help mitigate or avoid exposure to US estate taxes. Specific plans depend on the particular circumstances of each individual and we encourage you to contact US Tax & Financial Services to discuss your case.
If you have any questions regarding your tax planning, don’t hesitate to contact us.