Non-resident aliens (those individuals who are not US citizens and do not reside in the US) and visa card holders (non-US citizens who do not have a green card but who do reside in the US) may at times still have assets in the US. In these circumstances, they often do not receive favorable estate and gift tax treatment that many US citizens and green card holders are allowed. Without adequate planning, NRAs will pay far more when a property is gifted or inherited by another individual.
The 2018 Tax Cuts and Jobs Act increased the estate tax exemption for US citizens to $11.2 million for an individual and $22.4 for a married couple – yet any NRA that holds more than $60,000 in USD assets may be subject to estate taxes, which range from 18% to 40% of the total assets (range unchanged since 2013). This means that if an NRA were to pass away with a property valued at $1 million in the US, the estate taxes levied would be over $345,000. Under similar circumstances, a US citizen would be exempt from these taxes altogether.
In addition to these federal estate and gift taxes, the assets may also be subject to state estate and gift taxes, which can increase the tax liability further. If the property is valued at more than $5.45 million and is bequeathed or gifted to an unrelated individual who is more than 37.5 years younger than the owner, or if it skips more than one generation (such as a grandchild), then it may also be subject to the Generation-Skipping Transfer Tax. There is an annual gift exclusion to a non-US citizen spouse of $152,000 annually (unlimited between citizen spouses), and to a non-spouse, $15,000. Anything else is subject to taxation.
In January 2016, the US entered into estate and gift tax treaties with 16 other countries in order to resolve issues of dual-domicile and to reduce or eliminate double taxation. These treaties may also provide additional deductions or other tax relief. The countries with which the US has an existing treaty with include: Australia, Austria, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, Norway, South Africa, Switzerland and the United Kingdom.
Since it is obvious that the estate and gift taxes can be incredibly high, it is important that non-resident aliens have a clear understanding of the potential implications of the US estate and gift tax rules – and how to create a strategy that can minimize this tax burden. By structuring investments in an appropriate way, estate and gift taxes can often be removed or eliminated. This usually requires that the owner restructure the ownership of the assets.
Planning strategies can include some of the following actions, among others:
- Moving the assets to foreign corporate ownership (converting US situs property to non-US situs property): This strategy reclassifies property located in the US to a non-US classification since foreign corporate ownership interests are generally not considered the US situated. This process may involve creating both US-situs and non-US situs corporations or LLCs, or it may use techniques that remove equity from certain US assets, which can then be converted to non-US situs assets. Assets that can be considered personal, such as a primary residence or luxury goods, may not be suitable for foreign corporate ownership.
- Life insurance death benefits: These benefits, even when paid to a non-citizen who does not have a green card, are a non-US situated asset if the life insurance is owned by an NRA (rules for US citizens and green-card holders are different) . If planning activities structure these benefits properly, they would not be included in the estate of the non-US person.
- Qualified Domestic Trusts (QDOTs): When married to a US citizen, an NRA can use a QDOT to ensure access to the qualified unlimited lifetime marital deduction.
- Domicile Status: In certain circumstances, an individual may want to pursue domicile status. It is important to note that domicile status is determined differently for estate tax purposes than for income tax purposes.
Estate planning is complex and even more complex for NRAs. It is also made more complicated by the unique circumstances of each individual, such as the country of origin, type and amount of assets, relation to beneficiaries, time spent in the US, and future intentions for residency. Basic planning services are often not sufficient to account for the estate and gift tax implications that are imposed on non-resident aliens. An international estate planning professional may be consulted to help you determine any potential impact and develop a personalized approach that will account for all of your unique factors.
Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 325-8276.