For many people the United States is a major investment jurisdiction.
Whether that investment is made into stocks, bonds, managed funds, real estate or shares in US private companies – the size and scale of the US market is often irresistible for international investors.
One of the downsides of investing directly into the US can be that non-residents of the United States who own U.S. assets can be subject to U.S. estate tax.
This can significantly impact their estate planning strategies by imposing a significant cost on their estate.
This article discusses the exposure of non-residents to U.S. estate tax, the benefits of estate tax treaties, the relevance of international wealth in estate tax calculations, and the formalities required to transfer U.S. assets to beneficiaries.
U.S. Estate Tax for Non-Residents
Non-residents of the U.S. are subject to estate tax on their U.S. situs assets, which include real estate, tangible personal property located in the U.S., and certain intangible assets such as stocks of U.S. corporations.
The tax rates range from 18% to 40%.
Importantly the exemption amount is significantly lower for non-residents than for U.S. citizens and residents, currently only $60,000.
Estate Tax Treaties
The U.S. has estate tax treaties with several countries, including Australia, Canada, France, Germany, Italy, Japan, the Netherlands, South Africa, Switzerland, and the United Kingdom.
These treaties can provide several benefits, including:
Unified Credit
Some treaties allow non-residents to use the unified credit available to U.S. citizens, which can significantly reduce the estate tax liability.
Exclusions And Deductions:
Treaties may provide for exclusions of certain types of property or deductions for debts, taxes, and expenses.
Relief From Double Taxation:
Treaties can prevent double taxation by providing rules for the allocation of taxing rights between the U.S. and the treaty country.
Relevance Of International Wealth
For non-residents, the U.S. estate tax is generally limited to U.S. situs assets.
However, the international wealth of foreigners can still be relevant in certain situations.
For example, under some treaties, the U.S. may consider the decedent’s worldwide assets to determine the allowable unified credit or to apply pro-rata deductions.
Example Calculation (Singapore Resident: No Estate Tax Treaty With US)
The non-resident owns a $1,000,000 U.S. property and has no debts or other deductions:
1. Gross Estate: $1,000,000 (U.S. property)
2. Exemption Amount: $60,000
3. Taxable Estate: $940,000
Using the U.S. estate tax rates, the estate tax liability would be calculated based on the progressive rates.
For simplicity, assume the effective tax rate is around 34% for this taxable estate size:
Estate Tax Due: $940,000 x 34% = $319,600
This is major cost on a deceased estate and something that can be planned for ahead of time.
They key point here is to be aware of strategies to minimize or eliminate US estate tax.
Example Calculation (Australian Resident: Estate Tax Treaty With US)
The U.S.- Australia Estate Tax Treaty can provide relief and reduce the tax liability.
Consider an Australian resident who owns a $1,000,000 U.S. property and has $5,000,000 in worldwide assets.
The unified credit for U.S. citizens in 2024 is $13,000,000.
1. Gross Estate: $1,000,000 (U.S. property)
2. Worldwide Estate: $6,000,000
The proration of the unified credit is calculated as follows:
Prorated Unified Credit = U.S. Situs Assets/Worldwide Assets X Unified Credit
Prorated Unified Credit = 1,000,000/6,000,000 x 13,000,000 = 2,166,66
The effective exemption amount is $2,166,667.
3. Taxable Estate:
Since the U.S. situs assets ($1,000,000) are less than the prorated unified credit ($2,166,667), the taxable estate is reduced to zero.
4. Estate Tax Due:
With a taxable estate of zero, the estate tax liability is also zero.
Formalities For Transferring U.S. Assets
For those beneficiaries of deceased estates that have to deal with the transfer of U.S. assets from a deceased resident to a beneficiary, the following steps are required:
1. Obtain A Transfer Certificate:
The IRS requires a Transfer Certificate (Form 5173) to release the U.S. assets.
This certificate ensures that all applicable estate taxes have been paid or secured.
2. File Form 706-NA:
The executor must file Form 706-NA, U.S. Estate (and Generation-Skipping Transfer) Tax Return, to report the U.S. situs assets and calculate the estate tax due.
3. Pay Estate Tax:
Any estate tax due must be paid.
In the above examples, in Singapore the estate tax due is $319,600. Whereas in the case of the Australian estate no tax is due.
4. Submit Documentation:
Provide the IRS with necessary documentation, including the death certificate, will or trust documents, and appraisals of the U.S. assets.
5. Transfer of Title:
Once the Transfer Certificate is obtained, the executor can proceed with the transfer of title of the U.S. assets to the beneficiaries as per the deceased’s will or trust documents.
Conclusion
Other strategies exist to manage this exposure, including the formation of trusts in certain US states to hold assets.
The key point here is to plan the way you hold your U.S. assets as early as you can.
Indeed, those people who are non-residents of the U.S. holding US assets from countries that do not have an Estate Tax Treaty with the U.S. have the most severe exposure.
Please contact us to discuss any concerns or questions you might have with respect to holding US assets.