Tax Insights U.S. Estate Tax for
Nonresidents
Non U.S. residents: Be aware that U.S. estate tax laws apply to U.S. property A HUSBAND AND WIFE – both Mexican citizens – purchase an expensive vacation house in Texas, with home ownership attributed to the husband. The couple plan to become U.S. residents and spend more time at that house, perhaps making it their permanent residence. Unfortunately, the husband is killed in a traffic accident before those moves occur. His wife then learns that: • Nonresidents are required to file a U.S. estate tax return for U.S. property that has a value of more than $60,000, with tax rates ranging up to 40 percent. • Criteria differ for determining residency status for U.S. income tax and estate tax purposes. • Provisions in various tax treaties between the United States and other nations may determine a person’s country of domicile and estate tax jurisdiction at time of death. She regrets that she and her husband were not aware of those considerations before the house was purchased. To meet a large, unexpected U.S. estate tax obligation, she has no choice but to quickly sell the house at a price well below market value. Such unfortunate scenarios unfold all too often. Mexico and numerous other nations do not have estate taxes, so many nonresidents are unaware estate taxes even exist. Some may be well aware of residency requirements as they apply to income tax jurisdiction, but may be unaware that estate tax obligations are not based on those criteria. Those with some awareness of potential U.S. estate tax provisions may not be familiar with how those provisions and related international tax treaties apply to their specific circumstances. Nonresidents and their advisors need to address the following considerations before purchasing property in the United States.
U.S. Estate Tax Consequences for Nonresidents and Residents A NONRESIDENT FACES U.S. estate tax obligations for various assets situated within the United States, including houses and other real estate, tangible personal property, and securities in U.S. companies. U.S. securities that generate portfolio interest and bank accounts not used in connection with a trade or business in the United States are exempt, as are insurance proceeds. While U.S. citizens or residents face estate tax obligations on assets situated worldwide, they benefit from a taxable estate exemption of more than $5.5 million (the actual exemption amount for each tax year is based on an inflation index). A nonresident can only claim a $60,000 exemption against a taxable estate’s value. In all instances, a progressive scale is used to calculate the
Tax Insights: U.S. Estate Tax for Nonresidents estate tax obligation, with a 40 percent estate tax rate applied to taxable estates that have taxable value of more than $1 million.
Differing Standards for Determining U.S. Income Tax and Estate Tax Obligations AN INDIVIDUAL HOLDING a U.S. Permanent Resident Card (also known as a “green card”) has legal permission to permanently reside in the United States. That person is considered an alien resident, as are individuals who meet two other residency tests. Such standards define resident status for U.S. income tax purposes. For estate tax purposes, however, domicile – where a person is living (even briefly) with no present intent to leave – is crucial. That means someone considered a resident for U.S. income tax purposes could be deemed a nonresident for U.S. estate tax purposes if domicile is in another country at the time of that person’s death.
International Estate Tax Treaties Include Domicile Criteria MANY INDIVIDUALS SPLIT TIME living in the United States and other countries, thereby raising questions of where primary domicile exists. Estate tax treaties the United States has with other countries acknowledge such quandaries and include criteria for determining domicile upon individuals’ deaths. Criteria used to determine a person’s domicile at time of death include voter registration, employment, driver’s license or other items indicating a person’s intent for permanent and primary residence. The specific criteria used to determine domicile, however, vary among treaties. Uncertainties also arise in situations when a person dies in a nation with which the United States does not have a bilateral estate tax treaty. In such instances, the United States and that country may both claim domicile and tax jurisdiction for that person’s estate, leading to potential double taxation.
Steps to Take Before Purchasing U.S. Property A NONRESIDENT PLANNING to purchase property in the United States with the intention of becoming a resident needs to be aware of the potential estate tax consequences. That awareness includes understanding how residency is defined differently for income tax and estate tax purposes, as well as understanding how existing tax treaties affect potential estate tax obligations. A nonresident should prepare a will that is valid in the United States. While that does not ease nonresident estate tax obligations, the presence of a valid will saves heirs from confronting a lengthy and costly probate process to obtain ownership of the decedent’s U.S. property. A nonresident should also consider establishing a foreign corporation to purchase and own U.S. property prior to becoming a U.S. resident. In some instances, a qualified domestic trust (QDOT) may also be established so that U.S. property ownership transfers to a surviving spouse without being subject to estate tax.
2 www.weaver.com | 800.332.7952
CONTACT US Vince Houk, CPA Partner-in-Charge, International Tax vince.houk@weaver.com Annick Nguessan, CPA, MBA Director, International Tax annick.nguessan@weaver.com Weaver offers a variety of international consulting and compliance services that cater specifically to the tax needs of international companies, as well as those that desire to operate internationally. For individuals, we can help with tax planning and secondment arrangements, as well as address work permit and visa issues. And, if you or your company is ever audited, whether in the U.S. or abroad, Weaver can help defend you. Some services include: • Business modeling • Cross-border transaction planning, structuring and management • Expatriate tax compliance/planning • E&P computations and interest expense allocations • Foreign tax credit planning and compliance • Global structuring, M&A and refinancing strategies • Off-shore asset protection strategy • Supply-chain and shared services review • Transfer pricing compliance documentation • U.S. and foreign tax audit defense
Disclaimer: This content is general in nature and is not intended to serve as accounting, legal or other professional services advice. Weaver assumes no responsibility for the reader’s reliance on this information. Before implementing any of the ideas contained in this publication, readers should consult with a professional advisor to determine whether the ideas apply to their unique circumstances. © Copyright 2020, Weaver and Tidwell, L.L.P.