U.S. Estate Tax for Non-U.S. Owners of U.S. Property, Stocks and Companies

Who is a nonresident for estate tax

Estate tax residency is based on domicile — where a person lives with the intention of remaining indefinitely — not on the day-count test used for income tax. A foreign national can be a U.S. resident for income tax because of a green card or the substantial presence test, yet not be domiciled in the United States for estate tax, and the reverse can also occur. The analysis turns on intent and facts such as the location of the home, family, business and social ties, and immigration status.

The $60,000 exemption

The estate of a nonresident non-citizen generally receives a unified credit of $13,000, which shelters roughly $60,000 of U.S.-situs assets. Above that amount, estate tax rates rise quickly to 40 percent. The executor generally must file Form 706-NA within nine months of death when the U.S.-situs gross estate exceeds $60,000, and a transfer certificate from the IRS is often required before U.S. financial institutions will release assets.

Which assets are U.S.-situs

• Generally U.S.-situs: U.S. real estate; shares of U.S. corporations, including shares held in a U.S. brokerage account; tangible personal property located in the United States; and certain interests in U.S. business assets
• Generally not U.S.-situs: deposits in U.S. banks that are not effectively connected with a U.S. trade or business; debt obligations that qualify as portfolio interest; and proceeds of life insurance on the life of the nonresident
• Uncertain or fact-dependent: interests in partnerships and multi-member LLCs, for which the law is not settled

Shares of a non-U.S. corporation are generally not U.S.-situs, even if the corporation owns U.S. assets. This is why foreign holding companies have historically been used for U.S. real estate held by nonresidents. That structure has its own costs, including different income tax treatment on a sale and potential reporting in the owner's home country, and it must be respected in practice to be effective.

The effect of estate tax treaties

The United States has estate and gift tax treaties with a limited number of countries, most in Europe, plus Japan and Australia; Canada provides estate tax relief through its income tax treaty. These treaties can increase the available exemption, narrow the assets subject to tax or provide credits. The United States has no estate tax treaty with Mexico, Colombia, Venezuela, Argentina, Brazil or most other Latin American countries, so residents of those countries generally rely on the domestic rules alone.

Gift tax is different

A nonresident non-citizen is subject to U.S. gift tax only on gifts of U.S.-situs real property and tangible property located in the United States. Gifts of intangible property — including shares of U.S. corporations — are generally not subject to U.S. gift tax for nonresidents. Lifetime gifts can therefore play a role in planning, but the income tax basis consequences for the recipient and the rules of the donor's home country must be considered.

Common planning approaches

• Holding U.S. real estate through a properly structured foreign corporation, with attention to income tax on sale and home-country rules
• Using life insurance to provide liquidity for an expected estate tax
• Favoring asset types that are not U.S.-situs where consistent with investment goals
• Using trusts designed with both U.S. and home-country law in mind
• Documenting domicile carefully for individuals who spend significant time in the United States

Mistakes we see most often

• Holding a U.S. property through a single-member U.S. LLC and assuming it avoids estate tax — a disregarded LLC generally does not change the situs result
• Relying on joint ownership with a spouse, which can create unexpected inclusion and gift issues
• Assuming a U.S. brokerage account is exempt because it holds cash-like funds, when it often holds U.S. mutual fund or ETF shares
• Not having a plan for how heirs will access assets that require a transfer certificate

Sources and official references

• IRS — Some nonresidents with U.S. assets must file estate tax returns
• IRS — Instructions for Form 706-NA
• IRS — Frequently asked questions on estate taxes for nonresidents not citizens
• IRS — Estate and gift tax treaties (international)