The United States enforces an estate or succession tax concerning the transfer of specific assets situated within the US that are owned by an individual at the time of their death. This applies even if the deceased was not a citizen or resident of the United States (referred to as a non-domiciliary).
Assets subject to the US estate tax at the decedent’s death include:
- US real estate
- Tangible property physically located in the United States (such as automobiles, furnishings, jewelry, etc.). (Cash and currency are considered tangible personal property and will be taxable if situated in the United States)
- Certain intangible property, such as stock of corporations organized in or under US law, even if the deceased held the certificates abroad
- Debt obligations of a US person (e.g., bonds or other debt instruments issued by US companies)
- Qualified retirement plans held in the United States
- A US trade or business and bank accounts used in connection with a US trade or business
To compute the US estate tax, the representative of the deceased must determine the total value of the US situs assets held at the date of death. The value of an asset is its fair market value on the date of death rather than its value when acquired.
A limited exemption of $60,000 is applicable against the value of US situs assets included in the US taxable estate of a non-domiciliary individual. If the value of the individual’s US situs assets exceeds $60,000 at death, the estate’s representative is required to file Form 706-NA United States Estate (and Generation-Skipping Transfer) Tax Return with the US Internal Revenue Service (IRS). Form 706-NA is used to calculate the US estate tax liability, which is subject to progressive rates ranging from 18% to 40%.
If the value is $60,000 or less, no Form 706-NA is required, although financial institutions may request a US Transfer Certificate, certifying that the decedent’s property may be transferred without liability. Obtaining a Transfer Certificate from the IRS involves submitting an affidavit and various estate-related documents. With a processing time of six to nine months from the receipt of all necessary documentation.
Estate tax treaties
It’s noteworthy that the US has entered into a limited number of estate tax treaties (currently only 16), which may offer definitions for domicile, modify situs rules, reduce or eliminate double taxation, and provide additional deductions and tax relief.
Considering the consistent increase in foreign direct investment into the United States, the IRS has heightened its scrutiny of foreign estates with US situs assets. International financial institutions have also become vigilant in dealing with US situs assets and cautious about their distribution without confirmation of no US estate tax liability.
Estate planning for US assets is crucial for international investors. Proper planning can mitigate exposure to US estate tax and the associated delay in releasing assets to the estate’s beneficiaries. This planning often focuses on avoiding direct individual ownership of US situs property, taking into account both US rules and the investor’s home country rules.
Disclaimer: This is not legal advice, consult an attorney for legal advice or contact us.