Nonresident aliens (i.e., noncitizen nonresidents of the United States) who hold U.S. assets should think carefully about the U.S. estate tax implications.
There are a number of reasons why a non-U.S. person may hold U.S. assets, such as participating in a U.S. pension while working in the United States, receiving a U.S. inheritance from a family member, or simply investing in U.S. real estate or U.S. stocks.
In this blog, we describe the implications of holding U.S. assets upon death, which may depend on a number of factors, including the country in which you reside.
Scope of the Estate Tax – US Persons versus Nonresident Aliens
In determining estate and gift tax liability, the Internal Revenue Code (IRC) differentiates
between the estates of citizens and resident aliens, on the one hand, and nonresident aliens, on the other hand. For all those subject to the estate tax, the top federal estate tax rate is 40%.
Under the estate tax regulations, a “resident” decedent is a decedent who, at the time of his death, had his domicile in the United States. A person acquires a domicile in a place by living there, for even a brief period of time, with no definite present intention of later leaving that place. The estates of resident aliens follow the same rules and regulations as do the estates of U.S. citizens to determine estate tax liability. Both are subject to estate tax on their worldwide property, even if you reside abroad or the property is located outside the U.S. The estate tax is calculated based on the fair market value of the deceased’s assets on the date of passing.
Note! The rules regarding who is a resident alien for U.S. income tax purposes are quite different than the domicile concept described above. For example, non-citizens are considered resident aliens for income tax purposes generally if they have the right to permanently reside in the U.S. (known as the “green card” test) or spend a certain number of days in the U.S. within a three-year period (known as the “substantial presence test”). As such, it is possible, although not necessarily common, for a person to be considered a resident alien for U.S. income tax purposes, but not for estate tax purposes.
In contrast to the estates of U.S. citizens and residents, gross estates of nonresident aliens include only property “situated” in the United States.
Determining the Situs of Assets
The IRC and regulations define U.S. situs assets generally as including, but not being limited to, the following types of assets:
- Real estate and tangible property located in the U.S.
- Stock in a U.S. corporation & mutual funds
- Certain U.S. bank deposits
- Debt obligations of a U.S. person, the U.S., a state, or any political subdivision thereof, or the District of Columbia
- Certain intangible personal property, if issued by or enforceable against a U.S. resident, domestic corporation, or governmental unit
- Deferred compensation and pension benefits paid by a U.S. employer
The Gift and Estate Tax Lifetime Exemption – US Persons versus Nonresident Aliens
The Trump Tax Reform of 2017 significantly increased the federal estate and gift tax lifetime exclusion amount to very high thresholds for U.S. citizens and resident aliens.
For 2023, the gift and estate tax exemption is $12.92 million ($25.84 million per married couple). Lifetime gifts that do not qualify for certain annual exclusions will reduce the amount of gift and estate tax exemption available at death.
Importantly, unless further legislation is enacted, the current gift and estate tax exemption amount will be reduced by approximately one-half at the end of 2025 (estimated at $6.2 million per individual and $12.4 million per married couple).
Nonresident aliens, in stark contrast, are only granted a $60,000 exemption on U.S. situs assets. This means the risk of estate tax exposure is much higher for nonresident aliens holding U.S. situs assets.
The Role of Estate Tax Treaties
A crucial, but often overlooked, aspect of the U.S. estate tax is the significant role that treaties can play in determining one’s estate tax liability. This is particularly true with respect to nonresident aliens who own U.S. situs assets at the time of death.
The United States currently has estate tax treaties with 15 different countries. Many of these treaties significantly reduce or eliminate the amount of estate tax owed on U.S. situs assets. A list of these countries can be found here:
https://www.irs.gov/businesses/small-businesses-self-employed/estate-gift-tax-treaties-international
For example, NRAs living in Australia can benefit from the U.S.-Australia Estate Tax Treaty. Under Article IV of the treaty, the larger exemption threshold of $12.92 million (as of 2023) extends to NRAs who are residents of Australia. In order to take such a treaty position, it is important that the estate comply with the U.S. tax reporting requirements, which include reporting on both the U.S. estate tax return (Form 706-NA) and the treaty disclosure form (Form 8833).
Given that each treaty has its own nuances, rules, and qualifications, it is important to work with an advisor who has experience navigating treaty provisions.
