US estate taxes for non-Americans
What is the issue?
Non-US individuals owning US assets could be exposed to US gift and estate tax of up to 40% on death or when the asset is gifted. This could include shares in a US company, US real estate or other US investments.
US citizens and individuals who are domiciled in the US are subject to US gift and estate taxes on worldwide assets. The tax is up to 40% and is imposed when the individual owning the asset dies or makes a gift of the asset. However, there is a lifetime “exclusion” for up to $11,400,000 of assets, so many US citizens are not impacted by these rules.
Non-US individuals (i.e. who are neither US citizens nor US domiciled) are also subject to US gift and estate tax, but only on assets situated in the US.
However, the rules for non-US individuals only allow you to exclude up to $60,000 of assets. The $11,400,000 exclusion for Americans does not apply to non-Americans.
Therefore a non-US individual whose total US assets are greater than $60,000 could be exposed to US estate taxes on death. This is frequently an unexpected tax burden which in many cases could have been avoided with appropriate forward planning.
Furthermore, where an individual dies owning US assets, the property is “frozen” and cannot be transferred to anyone else until documentation has been filed with the US Internal Revenue Services and any US estate taxes have been paid.
Some countries, such as the UK, have an estate tax treaty with the US which can provide relief from US estate (but not necessarily gift) taxes. For example, a UK domiciled individual with shares in a US “C” corporation would typically be exempt from US estate tax because of the treaty. The treaty does not provide an exemption for all US assets, so a UK domiciled individual with an interest in US real estate, a US “S” corporation, partnership, or Limited Liability Company, may still be exposed to US estate taxes.
Individuals who are not domiciled in an appropriate treaty country will not be able to benefit from treaty relief. These individuals are likely to have US tax exposure on their US assets.
Non-US individuals with US investments (or who are considering acquiring US investments) should be made aware of the US gift and estate tax exposure so that they can seek advice and plan accordingly.
Such planning may include
- Reviewing the potential US tax exposure;
- Determining whether relief would be available under a treaty;
- Considering whether appropriate structuring should be done to mitigate the exposure. Examples of such planning include putting in place a holding structure for the US assets to eliminate the US exposure, or (for married individuals) a specially drafted Last Will & Testament to defer the US estate tax until the death of the second spouse.