Inadequate planning, or a failure to plan, may cost non-U.S. citizens who own U.S. situated property millions of dollars in unnecessary estate and income taxes. Under current law without proper planning, “nonresident aliens” (NRAs) holding U.S. situated assets valued more than $60,000 USD may be subject to the full impact of the United States federal estate tax.
The 2018 Tax Cuts and Jobs Act increased the estate tax exemption(1) available for U.S. citizens to $11,200,000 USD for an individual or $22,400,000 USD for a married couple and left the gift and estate tax rules unchanged as they apply to NRAs.
This means many NRAs with certain U.S. property, at death, may only be afforded an exemption of $60,000 USD on certain property. NRAs can benefit from proper planning to avoid unexpected tax consequences.
Assets Subject to Estate Tax
The $60,000 USD estate tax exemption applies to any NRAs estate consisting of U.S. situated assets. Generally, U.S. situated assets include American real estate, tangible personal property, and securities of U.S. companies. Whether an asset is U.S. situated or not is a facts and circumstances test beyond the scope of this piece and should be evaluated by professional counsel. Because the individual States are left to determine their own tax and residence policies, separate State analysis of property and tax laws may be required. Numerous countries have entered into treaties with the U.S. that may impact the taxation of certain assets, clarify domicile and situs issues, and provide additional deductions. The citizenship of an NRA must be considered on a case-by-case basis to understand both U.S. and home country tax impacts of planning decisions.
A note on income tax: Laws and regulations affecting federal and state income tax are different than those applying to estate and gift tax regimes. Income tax planning should be considered separately.
Annual Gift Limits
Annual exclusion of gifts to a non-U.S. citizen spouse is $152,000 USD per year compared to the unlimited annual gift between citizen spouses.
Under current law, the annual gift exemption to non-spouses is $15,000 USD.
An NRA is only subject to U.S. gift and estate tax on U.S. situated assets. The following matrix demonstrates generally accepted federal tax treatment of certain types of assets:
Planning Opportunities
There are numerous planning opportunities for the prepared international client.
Structuring foreign corporations to hold otherwise U.S. situated assets may alleviate U.S. gift and estate taxes, as foreign corporate ownership interests are generally not considered U.S. situated. Management and maintenance of a foreign corporation with a valid business purpose may be complex and costly and may have unintended tax or legal consequences in the client’s home country. Certain assets which could be construed as personal in nature (such as a primary residence, vacation home, or luxury items) may not be suitable for ownership by a foreign corporation.
Life insurance death benefit paid to a non-citizen is considered to be an intangible non-U.S. situated asset and, properly structured, it is not generally included in the gross taxable estate of a non-U.S. person. Trust ownership of a life insurance policy may be useful in certain situations. Offshore life insurance may be useful to hold assets to avoid current income taxation on investment returns within the policy, as life insurance cash values offer tax deferral of gains.
Where an NRA is married to a U.S. citizen, use of a qualified domestic trust (QDOT) can provide a qualified unlimited lifetime marital deduction. Legal counsel should be consulted to properly design such a trust.
Pre-immigration planning prior to establishing domicile in the U.S. will likely be useful in reducing an individual’s future tax liability.
As with all tax and legal situations, a team of professional advisors, including tax and legal experts in both the U.S. and the client’s home country, should be engaged to evaluate and implement planning strategies.
(1) The revised exemption, absent legislative renewal will expire on December 31, 2025, and revert to pre-2018 levels. Under current law, the exemption will increase each year with inflation.
This material is intended for informational purposes only and should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney, tax advisor or plan provider.