US Estate Tax
Understanding the nuances of the US tax system
US Estate Tax
Since 2018, US citizens and US domiciles have been subject to estate and gift taxation at a maximum tax rate of 40% with an exemption amount of $10 million, indexed for inflation. The indexed exemption amount for 2023 was $12,920,000.
In contrast, non-US domiciles (i.e. potentially expatriates) are subject to US estate and gift taxation with respect to certain types of US assets, also at a maximum tax rate of 40% but with an exemption of $60,000, which is only available for transfers at death.
Double Taxation Agreements
As of January 2022, the US has entered estate and/or gift tax treaties within 16 jurisdictions. Tax treaties may define domicile, resolve issues of dual domicile, reduce or eliminate double taxation and provide additional deductions and other tax relief.
Countries with whom the US currently has gift and/or estate tax treaties:
Australia
Canada*
Finland
Germany
Ireland
Japan
Austria
Switzerland
France
Denmark
Italy
Greece
South Africa
Netherlands
United Kingdom
*Through the income tax treaty
Assets Subject to US Estate Tax
US domiciles are taxed on the value of their worldwide assets at death in the same manner as US citizens. Non-US domiciles (expatriates included) are taxed only on the value of their US “situs” assets.
US situs assets generally include real and tangible personal property located in the US, business assets located in the US, and stock of US corporations.
How Could This Be Relevant to an Expatriate Living Outside the US?
Many investors presume that the US federal estate tax only applies to those domiciled or resident in the US, or on investments physically located in the U.S., however this is a grave misconception.
If an investment in US shares (for example, Microsoft, Apple or Facebook) or other US situs assets is not structured properly and the amount exceeds $60,000, the Internal Revenue Service (IRS) can take up to 40% of the fair market value at the time of death.
Many Non-Resident Aliens (NRAs) (expatriates) are not aware of the US estate tax exposure of 40% on all investments in US securities. As a result, the Non-Resident Aliens (NRA’s) surviving family can be often surprised by the application of the US Estate Tax to the NRA family’s investment in US securities (and other deemed US-situs assets, e.g., US real estate), which results in a high administrative and US tax burden.
With the Foreign Account Tax Compliance Act (FATCA) in place since July 2014, many non-US banks are beginning to enforce the US estate tax against unsuspecting NRA clients who discover that the US will apply a 40% estate tax to the entire lot of US property.
How Can Taxes Be Mitigated If a Double Taxation Agreement Does Not Apply, and I Want to Hold US Shares or Other US Situs Assets?
An offshore portfolio bond is another name for an offshore investment bond. It is a potentially tax efficient investment wrapper that can hold different assets, such as stocks and shares and mutual funds.
Where directly held shares are transferred to a portfolio bond, the transfer is unlikely to be liable to estate tax if the portfolio bond is regarded as non-US situs. For example, if the portfolio bond is based in the Isle of Man or Ireland. There are generally no US income tax or capital gains tax implications for a non-US person transferring the shares.
Once the assets are held within the bond, the previous owner is deemed to have renounced all beneficial rights to the assets and therefore, the value of the shares are not assessable to US estate tax, upon death.
Non-US citizens who own property in the US including US securities, need to have a clear understanding of the potential implications of the US estate rules as, residency and domicile choices can have major tax implications.
Frequently Asked Questions
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Non-US domiciles covers US non-resident aliens, and also US citizens and US resident aliens (that is, green card holders) living outside the US. A non-resident alien is someone who is not a US citizen or resident. US citizens, resident aliens and US residents are US persons.
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The non-resident status is based upon the assumption that you do not spend substantial time in the US, however you may become a US resident under the “substantial presence” test.
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Obtaining a green card is one way to establish US residency. Having a green card may allow for easier travel into and out of the country and may allow you to remain in the US indefinitely. However, holding a green card subjects you to US income tax on your worldwide income during the entire time that you hold the green card (even if you are living outside the US), and it is one factor considered when determining whether you are a US domiciled.
An individual who is considered domiciled in the US for estate and gift tax purposes is subject to US estate and gift tax on worldwide assets. Surrendering your green card will cause you to be considered a non-resident alien for US income tax purposes. Upon surrendering your green card, you will need to consider whether you are subject to the US expatriation tax or “exit tax.”
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Estate and gift tax rates currently range from 18% - 40%. The rates are the same whether you are a US citizen, US domiciliary, or non-US domiciliary.
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For US domiciles, exemptions are available against gift tax and estate tax for US citizens and domiciles, equivalent to $12,920,000 of value in 2023.
For non-US domiciles, an exemption of $60,000 is available against the value of assets includable in the US taxable estate. In addition to the Federal estate and gift tax, there may be additional state estate and gift taxes.
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US citizens and domiciles are subject to gift tax on all lifetime gifts, regardless of where the property is located.
Non-US domiciles are subject to US gift tax only on transfers of tangible personal property located in the US and real property located in the US.
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There is an annual exclusion from US gift tax for “present interest” gifts. In 2022, the annual exclusion amount is $16,000 per donee per year (indexed for inflation in $1,000 increments). US citizens and US domiciles can also “gift split,” allowing married donors to exclude up to $32,000 per donee per year.
Gift splitting is not permitted if either spouse is a non-US domiciliary. An unlimited amount can be gifted to a spouse who is a US citizen, whereas gifts to a non-US citizen spouse are offset by an increased annual exclusion. This annual exclusion for gifts to non-US citizen spouses is $164,000 for 2022 (indexed annually).
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Once any available annual exclusions or marital or other deductions are utilized, the available exemption will offset taxable gifts or bequests.
The exemption amount is $12,920,000 in 2023 for US citizens and US domiciles. Any part of the exemption used during life will not be available as an exemption at the time of death.
There is no exemption amount available for lifetime transfers by non-US domiciles, and the exemption amount for transfers at death by non-US domiciles is $60,000.
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If the home country has any income, social security or transfer tax treaties with the United States, the treaty rules can mitigate double taxation. The home country laws also may grant tax credits for U.S. taxes paid. A tax advisor in your home jurisdiction can easily assist with this.
U.S. Brokers are not responsible for estate tax compliance, so it’s a matter for non-resident aliens and their appointed advisors. However, brokers will require a conclusion of IRS estate proceedings before releasing assets from the account of the deceased.
Non-resident aliens should take care to understand how repatriation of funds work on death. They may have delays due to probate of the estate and getting IRS estate tax clearance. By opening a U.S.-based brokerage account, it lands the account in the U.S. (Non-residents holding U.S. securities in a foreign brokerage account must count those U.S. securities in a U.S. estate.)
Cross-Border Estate Planning Can Be Complex, and the Resolution of One Issue Can Create Another.
Contact us to speak to one of our qualified advisors to help you navigate the complexity.