Estate tax issues for non-resident aliens can be challenging. This is certainly the case with IRS Form 5173 (often called an IRS Transfer Certificate).
In this post, we discuss the mechanics of Form 5173. We will give you instructions and also show you some tips and tricks so you can get the form as quickly as possible. Let’s dive in.
Table of contents
- Non-Resident Estate Tax Basics
- What is a Form 5173?
- What Accounts Require an IRS Federal Tax Clearance Certificate
- How do I get a tax clearance certificate from the IRS?
- Federal Transfer Certificate Requirements
- How to Get a Transfer Certificate if Form 706-NA is Not Required
- How long does it take to get an IRS transfer certificate?
- How to Get an IRS Transfer Certificate on Form 5173
- Final Thoughts
Non-Resident Estate Tax Basics
Many folks have heard of the U.S. estate tax even though less than 1% of Americans are subject to it. But did you know that the U.S. estate tax is also applicable to U.S. non-residents?
For deceased non-residents who had U.S. “situs” assets, the estate tax is levied for any amounts greater than $60,000. For example, if a non-resident passed away and had real estate valued at $100,000, their estate would be liable based on the net estate value of $40,000.
An estate must have an executor who will administer the estate affairs. The executor must hire tax and legal professionals to prepare and file Form 706-NA (if required) along with the necessary documentation. The form will calculate the decedent’s taxable estate, allowable deductions, and any resulting U.S. estate tax liability.
You must file Form 706-NA within nine months of the date of death. However, you can file a six-month extension. Typically after 9 months you can request an estate tax closing letter, an account transcript and a transcript of the tax return.
What is a Form 5173?
Simply stated, it is an IRS issued form that states that a foreign estate tax liability has been paid or settled and the investment custodian can release assets to the executor. The assets are only U.S. “situs” assets.
U.S. “situs” assets would include U.S. real estate, tangible property, and also U.S. stocks. Fortunately, the IRS excludes certain assets from U.S. non-resident estate taxation. U.S.-based bank accounts and bank deposits are the most commonly excluded asset.
U.S. situs assets include any U.S. stocks held in a brokerage account. To release the funds from the deceased non-resident’s account, the estate executor must provide certain documents and forms to the investment brokerage.
Once the executor files Form 706-NA, the IRS has the ability to complete an estate tax review if necessary. Once the IRS approves the return, they will subsequently issue a tax clearance certificate. The IRS will only issue transfer certificates when they determine that the estate tax (if any) has been paid.
Under U.S. tax law, a U.S. brokerage firm cannot transfer assets from the decedent’s account until they receive Form 5173 from the executor. The investment broker typically can only release or transfer the account assets once the executor, surviving joint tenant, trust beneficiary, or another person legally entitled to receive the decedent’s assets provide to broker an original “Transfer Certificate” (IRS Form 5173) received from the IRS.
What Accounts Require an IRS Federal Tax Clearance Certificate
The IRS Transfer Certificate shows that the decedent’s estate has met its U.S. federal estate tax liability. Many investment custodians require the transfer certificate even when the assets are not subject to U.S. taxes. This is typically cash and non-U.S. securities.
The transfer certificate requirement only applies to the following account types:
- Individual Accounts
- Joint Accounts
- Sole Proprietors
- Transfer on Death Accounts
- UGMA and UTMA accounts
- Conservatorship or guardian accounts
- Qualified Accounts
- Trust Accounts
An IRS Transfer Certificate is not required when a non-resident decedent’s estate (regardless of citizenship) is administered by a qualified executor or administrator acting within the U.S.
How do I get a tax clearance certificate from the IRS?
In the event of death, the disposition of the assets in your account depends on how your account is titled. If, for example, the account is titled as joint tenancy with another person, title will automatically pass to the joint tenant. The brokerage still requires a transfer certificate even though title automatically passes.
Similarly, if a trust holds the account title, disposition of the account’s assets will be under the terms of the trust instrument. If the title to your account does not pass automatically, an estate proceeding will be required before the account assets can be distributed.
The estate executor (or representative in your country of residence) will coordinate with a U.S. representative. They would file for appointment with the probate court in the state where the account is held. Your U.S. representative can collect the account proceeds following your will (or the applicable laws if there is no will) once the tax clearance has been received.
In addition, the executor should consider any state inheritance or estate tax laws of the state in which the investment account (or real estate) is located. The state may have similar rules and filing requirements before any asset transfer. Make sure you review the state instructions.
Federal Transfer Certificate Requirements
According to U.S. Treasury Regulations, estates of non-resident decedents must obtain an IRS Transfer Certificate before requesting an asset transfer from a decedent’s account.
You must file Form 706-NA to obtain IRS Form 5173. This can be a lengthy process. The IRS admits that the process can take a year or even longer.
Unfortunately, many estate executors realize that they must file Form 706-NA a little too late. They often ask the brokerage to release the shares, and then the request for Form 5173 is made. Many don’t realize that Form 706-NA must be filed before the IRS will issue the transfer certificate.
First of all, are the shares book-entry (electronic), paper share certificates, or a mixture? If they are already in electronic form, you will not address missing paper certificates.
When shares are in paper certificate format, they must be converted into electronic format before being sold or transferred. Still, this conversion will happen after Form 5173 is issued.
Remember that no share transfer can take place until the brokerage receives the Federal Transfer Certificate (Form 5173). At that point, the brokerage will process the transfer under the Medallion Guarantee process.
Brokerages do not require Form 5173 if a Grant of Probate is obtained in the U.S. It is also not required for companies not incorporated in the U.S., even when the share registrar is located in the U.S.
How to Get a Transfer Certificate if Form 706-NA is Not Required
Form 706-NA is not required if the fair value of the decedent’s U.S. estate is less than $60,000. As such, you must submit the following items to the IRS. Make sure to include English translations and instructions if necessary:
- A copy of the will along with codicils (if applicable).
- The death certificate.
- A copy of a inheritance or death tax return and any statements or supporting documents filed with foreign tax authorities other than the U.S.
- An affidavit made under oath before a local official or notary public. The affidavit can be a letter that is signed by the executor or other representative of the estate. It should include the following:
- The decedent’s birth date and country of birth.
- The date the decedent became a U.S. citizen. Alternatively, a statement that the decedent never became a U.S. citizen.
- A list of all the U.S. situs assets at the date of death and their respective values at that date. For any U.S. investment or bank account, please make sure to include the account number.
- The decedent’s residence and citizenship at date of death.
- Whether the decedent had any U.S. bank accounts that were used in a U.S. trade or business.
If any of the above items are not available or not applicable make sure to include a statement describing why.
How long does it take to get an IRS transfer certificate?
The IRS states that the time frame to process the affidavit is six to nine months from when the IRS receives all required documentation. As such, the entire process can take over a year.
You should file Form 706-NA only when required. Filing the return without the requirement can ultimately delay the issuance of the Transfer Certificate.
If the documents support that there is no need to file Form 706-NA, the IRS will issue a letter stating that the transfer certificate is not required and, accordingly, will not be issued.
Check with your financial institution for their requirements. The following are a list of investment brokerages that will typically ask a transfer certificate:
- Charles Schwab
- Morgan Stanley
- TD Ameritrade
- Merrill Lynch
How to Get an IRS Transfer Certificate on Form 5173
Just follow the steps below:
- Review all U.S. situs assets and determine proper value on date of death.
The executor must identify and properly value the assets. This includes stocks, mutual funds and real estate (among other items).
- Hire qualified tax and legal professionals.
Most international based executors will find it difficult to navigate U.S. tax laws. That’s where a qualified CPA and attorney can assist.
- Determine whether Form 706-NA is required.
Non-resident decedent estates with net assets greater than $60,000 are subject to U.S. estate tax. If assets are greater than $60,000, Form 706-NA is required prior to the issuance of Form 5173.
- Settle the estate tax and request the form issuance.
Once the estate tax is paid and a closing letter is received, the executor can then request the form. Just make sure everything is complete and accurate.
- Sit back and wait.
By the IRS’ own admission, it can take a minimum of 6 months to receive the form. We have seen instances when it takes over a year. This emphasizes the need to make sure you supply accurate information upfront, so you do not prolong the process.
|Merrill Lynch||Business or LLCs|
|Charles Schwab||Individual Accounts|
|Fidelity||Transfer on Death|
A non-resident alien with U.S.-based assets should carefully consider any estate tax issues. Planning opportunities exist for non-residents to hold U.S. situs assets through different structures, including foreign blocker corporations. Many of these issues can shield or lower the decedent’s gross estate and estate taxes.
Remember that federal estate tax law is different for U.S. residents or citizens compared to deceased nonresidents. Make sure you track date of death values for the estate of a decedent and properly reflect them on the estate tax return. The administration of the estate and the American assets is the responsibility of the executor.
Far too often, executors spend time researching and gathering assets in their local country and don’t address the U.S. estate tax issues until later. Make sure you follow the instructions and hire a qualified CPA and attorney.