We see clients who are eager to jump into the U.S. real estate market. They have studied the federal and state tax situation and have a general understanding of how they will be taxed.
But how much do these non-residents know about the U.S. estate tax laws? Most CPAs don’t know a big difference between the estate laws as they relate to non-resident aliens. The penalties can be high so let’s jump in.
The good news for U.S. taxpayer citizens and non-citizen residents is that the exemption is high. It is $11.7 million per person for 2021. So it will impact relatively few people.
However, the story for non-resident aliens (or non-citizens) is a little different. The estate exemption is only $60,000. As a result, the estate tax is levied when a non-resident alien’s estate transfers “U.S. situs” assets over $60,000.
This article will address how the estate tax works for non-resident aliens and provide a few tips along the way.
U.S citizens and residents are subject to estate tax on worldwide assets. It does not matter where the assets are located.
But non-resident aliens are subject to estate tax only on assets considered “U.S. situs” property.
What about Tax Treaties?
But all is not lost. The U.S. does have tax treaties with many other countries.
But the first question is determining whether the client is a “non-resident” in the eyes of the IRS.
How to determine if you are a non-resident alien?
For estate tax purposes, an individual is deemed a “resident decedent” if that person is considered “domiciled” in the U.S. when they passed away.
The U.S. Treasury has defined “domicile” as a person who lives there for even a short period, and there is no current intention of moving later. A residence that does not intend to remain indefinitely will not necessarily constitute domicile, nor does the intention to change your domicile effect such a change unless accompanied by actual leaving. As you can see, this is a little complex.
But put into practice, it can be a little more subjective. The issue of domicile is based on a variety of facts. Some of which include the following:
- Length of time they spent in the U.S and time spent abroad;
- The cost, size, and nature of the houses or other residences (owned or rented);
- Location of family and close friends and relatives;
- The visa status;
- Place of any business interests, licenses, and any voting information;
- Declarations or residence statements in wills, deeds, trusts, etc.
When a married U.S taxpayer passes away, there is an unlimited marital deduction when the property is left to a U.S. citizen.
But when a U.S. citizen passes away and assets are transferred to a non-citizen, the same unlimited marital deduction is only available if the assets are transferred into what is called a Qualified Domestic Trust ( or “QDOT”) for the ultimate benefit of the non-citizen spouse.
Determining whether an asset is considered U.S. situs property can be subjective.
The U.S. has established estate tax treaties with the following countries:
- South Africa
- The United Kingdom
The list above can change depending on treaty updates. Each of the above treaties changes the estate rules for non-resident aliens who reside in these countries. Ensure you review the treaties first, as the rules will generally be more favorable than the primary estate rules.
The truth is that estate tax treaties between the U.S. and many other countries will typically provide a more favorable tax treatment to any non-residents by reducing or limiting the type of assets that are considered situated in the U.S. and fall under U.S. estate tax rules. The executors for non-resident estates sure make sure to review such treaties as applicable.
Form 706NA, United States Estate Tax Return
So what tax return is filed, and how is it completed? This can be a challenge.
Executors for non-residents are required to file an estate tax return (Form 706NA) when the fair value of U.S.-based assets at the date of death exceeded $60,000. This form is only used for estates of a non-resident who is not a U.S. citizen. This amount represents the “exemption equivalent” of the applicable unified credit.
If the decedent had made substantial lifetime gifts of U.S. property, a U.S. estate tax return could be required even though the value of the decedent’s U.S. situated assets is lower than $60,000 at the date of death.