U.S. Estate Planning for Non-U.S. Persons
by Kyle Lodder
Estate planning is often a forgotten element when non-U.S. persons plan their investment into U.S. real estate or business expansion into the U.S. As a result, many non-U.S. persons are unknowingly exposed to U.S. estate tax or other related land mines in connection with their U.S. investments due to incomplete planning focused on the corporate and/or personal income tax consequences. However, estate planning is an important piece of the puzzle and should not be forgotten when planning the investment or business expansion into the U.S.
For U.S. estate tax purposes, a “U.S. person” is an individual who is either 1) a U.S. citizen, or 2) domiciled in the United States. A person acquires U.S. domicile by being physically present in the U.S. and establishing intent to reside in the U.S. permanently. Citizens of other countries who aren’t domiciled in the U.S. are considered to be non-U.S. persons for U.S. estate tax purposes.
The U.S. federal estate tax is a “net worth” tax, based on values at the date of death of a non-U.S. person who owns U.S. situs property. U.S. situs assets are such things as:
- Corporate stock, even if held in a brokerage account outside the U.S. (e.g. Apple stock held in your brokerage account in the UK)
- Mutual funds
- Pension plans and annuities, including 401(k) plans and IRAs; and
- Debt obligations of U.S. individuals, corporations, partnerships, trusts, or government.
- Real property (e.g. vacation or rental home in the U.S.)
- Tangible personal property located in the U.S. at death (e.g. car at your vacation home)
For non-U.S. persons, $60,000 of U.S. situs property is exempt from U.S. federal estate tax. This amount is considerably less than the annually inflation-adjusted $5.49 million exemption allowed for U.S. persons. Any assets in excess of the $60,000 exemption are taxed at graduated rates between 18% and 40%.
However, the executor of the decedent’s estate should consider whether the U.S. has an estate tax treaty with the decedent’s country of residence at time of death to capture additional tax savings.
Here are several planning techniques that could be used to reduce U.S. estate tax exposure. This list is not an exhaustive list, but some planning considerations.
- Consider gifting assets directly or in trust (to spouse, children, family) to reduce taxable U.S. estate and to shield future growth from estate tax.
- Consider the advantage of basis adjustments when passing appreciated property to heirs at death.
- Consider liquidating foreign stock portfolio of U.S. stocks prior to death to avoid U.S. federal estate tax.
- Obtain a non-recourse mortgage on U.S. real property to reduce value of real estate subject to U.S. tax.
- Consider purchasing life insurance to pay for possible U.S. estate tax.
- Consider holding the U.S. situs property through a foreign entity such as a foreign corporation or foreign trust.
- Sell the U.S. situs property prior to death. There would be income tax in the U.S. and country of residence, but foreign tax credits should be available to prevent double taxation.
Inadequate U.S. estate planning can result in many unpleasant surprises. Here is a non-exhaustive list of items to watch out for:
- The impact of nothing having a Will in place or the Will doesn’t govern the assets in the U.S. This can result in either 1) complications for the executor administering the estate, along with conflict amongst the heirs, 2) difficulty processing the estate through the U.S. courts, or 3) inefficient U.S. tax consequences.
- Several U.S. states have estate tax and/or high probate fees. States don’t typically allow tax treaties to be used to avoid or reduce estate tax.
- Sound estate planning in the country of residency, but may actually be poor estate planning in the U.S. due to differing tax laws. Collaborative estate planning is the multiple jurisdictions is prudent.
- Failure to consider the U.S. gift tax, as it often is a significant different taxing approach compared to the country of residency. For example, gifting U.S. real estate to heirs results in U.S. gift tax but often results in a deemed disposition capital gain in the country of residency. The different types of tax may result in the inability to claim foreign tax credits to avoid double tax on the transaction.
- Failure to consider tax implications of heirs who are U.S. persons.
- Failure to consider the title of certain assets. The way an asset is titled can have varying impacts on the administration of the estate.
Estate planning is quite dynamic. There are many considerations in making a prudent estate plan that meets one’s desired legacy goals. There isn’t a one-size-fits-all solution. Planning to mitigate the U.S. estate tax implications is an important piece of the puzzle. The non-U.S. person who holds U.S. property is well-advised to enlist the guidance of a qualified U.S. International Estate Planning specialist.
If you require additional information on any aspect of these complex rules, please contact Kyle Lodder at 360.599.4340 or firstname.lastname@example.org. Kyle Lodder is a Certified Public Accountant and is the owner of Lodder CPA PLLC, a U.S. international tax firm. Kyle has the experience and knowledge to help non-U.S. persons owing U.S. property with their estate planning needs.
The material appearing in this communication is for informational purposes only and should not be construed as legal, accounting, or tax advice or opinion provided by Lodder CPA PLLC. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials have been prepared by a professional, the user should not substitute these materials for professional services, and should seek advice from an independent advisor before acting on any information presented. Lodder CPA PLLC assumes no obligation to provide notification of changes in tax laws or other factors that could affect the information provided.