Foreign Nationals and U.S. Estate Tax: What You Need to Know

U.S. estate tax is a tax on the value of certain “U.S. situs” property you own at the date of death. It is not a tax on the increase in value of that property, and the tax is not limited to U.S. real estate. A U.S. estate tax return must be filed within 9 months of the death unless an extension is obtained.  For many individuals, especially those from non-treaty countries, the tax applies when the aggregate U.S. situs property of the decedent exceeds US $60,000.

What is Taxed?

Foreigners (nonresidents[1]) are subject to U.S. estate tax on their so-called “U.S. situs” property (hereafter referred to as U.S. assets) which includes,[2] but is not limited to:

• Real estate located in the U.S.,
• Furnishings, including certain artworks, located in the U.S. real estate, if the real estate has been rented out,
• The shares of U.S. corporations, even if the shares are held in a brokerage account in your home country and, in some cases, even if they are held in a pension account in your home country,[3]
• U.S. mutual funds that are formed as corporations, [4]
• Your ownership of a U.S. “money market fund” which you may hold at a U.S. bank or U.S. brokerage firm,[5]
• Certain private debt due to you from U.S. persons,
• Equity memberships in golf clubs,
• Vehicles and yachts which remain in the U.S., and
• Certain U.S. pension plans or annuities (including IRA and 401(k) plans.

What is the Rate of Tax?

The regular U.S. estate tax rate schedule contains graduated tax rates, running from 18% to a maximum of 40% on the portion taxable U.S. assets exceeds US $1,000,000.    However, the computation of the actual tax is more complicated than simply applying the tax rate to your U.S. assets because there are many adjustments to determine the actual taxable amount of your U.S. assets.

For example (but not limited to):

• There is an exemption for the first US $60,000 of U.S. assets,
• Certain deductions for debts and expenses are allowed proportionately,
• There may be a tax treaty between your country and the U.S. which reduces or even eliminates the estate tax on your U.S. assets, (See Tax Treaties, below),
• Certain assets which appear to be U.S. assets, such as U.S. bank accounts, may not be treated as U.S. assets if, for example, you are not engaged in U.S. business,
• Certain debt of U.S publicly traded entities, and certain debt creating “portfolio interest” may be exempt,
• Certain U.S. assets subject to non-recourse loans may be partially exempt,
• Certain U.S. assets of decedents of countries with applicable spousal “community property” rules can be partially exempt.
• Some Wills provide for U.S. assets to pass to a (non-U.S. citizen) surviving spouse in a Qualified Domestic Trust.

 If a U.S. Estate Tax Return is not Filed, Who is Affected, and How are They Affected?

Caution, this can be alarming! 

• The executor has the obligation to file the estate tax return,[6] and any person, in any country that is in actual or constructive possession of any property of the decedent, including a foreign executor, spouse, lawyer, accountant, banker, stockbroker, etc., is treated as an executor, If there is no U.S court probate of the U.S. assets.[7] If there is court probate, the person designated as a personal representative in the U.S. court has the obligation to file,
• The executor, as defined above, has the obligation to pay the tax and has a potential liability for failure to pay it,[7]
• If the estate tax is not paid, an automatic IRS lien is attached to all the assets of the executor (as defined above),[8]
• An implied 10-year IRS special estate tax lien also attaches to the U.S. assets on the date of death, which normally would not appear in County records, and therefore can be missed on a title search.[9] This may result in subsequent adverse surprises for buyers and sellers. The lien is discharged only by filing an estate tax return and obtaining a transfer certificate from the IRS discharging the lien.  This may cause the buyer to delay, or possibly even “kill”, an otherwise valid sale if an estate tax return has not been previously filed.
• The heirs and others have a liability (transferee liability) if they receive certain “non-probate” assets from the estate,[10] or probate assets from the estate, [11]
• On the heir’s future sale of the U.S. real estate (for example), the heir will have a zero cost base in the property at death, if an estate tax return has not been filed.[12]

Tax Treaties

The existence of a relevant tax treaty between the U.S. and your home country may result in a substantial reduction, or even elimination, of any U.S. estate tax.  The U.S. has 15 estate tax treaties with other countries, some of which include gift and generation-skipping transfers. In addition, because Canada does not have an estate tax, per se, there are beneficial estate tax provisions in the income tax treaty between Canada and the U.S.  Each treaty is completely different, although other than Canada’s, each is constructed from a common framework.

Occasionally, treaties are terminated.  A U.S./Norway estate tax treaty was terminated on January 1, 2015, because of Norway’s 2014 repeal of inheritance tax.  Similarly, a U.S./Sweden estate tax treaty was terminated on January 1, 2008, because of Sweden’s repeal of inheritance tax in 2004.

Of course, one objective of tax treaties is to assist in avoiding double tax. This is often accomplished by stipulating which types of assets are allowed to be taxed in a specific country.  Alternatively, when a specific asset can taxed in both countries, the treaty essentially establishes, for specific types of assets, which country has the first right of tax, and thus which country therefore would provide a tax credit for tax paid to the first country.

However, treaties often have other beneficial provisions as follows:

Enhanced Unified Tax Credit

Once the preliminary U.S. estate tax of a foreign estate is determined, the tax code then provides a “unified tax credit” of US $13,000 [13] against that preliminary tax, to arrive at the net estate tax payable. Some treaties provide an alternative increased unified tax credit, according to a formula, for the estates of decedents who are eligible under that treaty.   The alternative increased amount of the tax credit is usually a portion of the unified tax credit available to U.S. citizens.  It is generally allowed to the foreign estate in the same proportion that the decedent’s U.S assets bear to the decedent’s worldwide assets at the date of death. The unified tax credit for U.S. citizens is indexed for inflation.  For deaths in 2019 the credit is US $4,505,800, but this may be reduced significantly in 2025.

Some examples of treaties containing that benefit include those with Canada,[14] Germany,[15] Finland, [16] and Switzerland [17].

Example.   Michael was a citizen and resident of Canada and a nonresident alien of the U.S.  He passed away in 2019 when his U.S. taxable estate was US $500,000, and his worldwide assets at the date of death were US $5 million.  In the U.S. estate tax rate schedule, the preliminary estate tax on US $500,000 is US $155,800.  Therefore, the unified tax credit is a maximum of $450,580, (10%[18] of 4,505,800), limited to the actual amount payable, so in this case there is no estate tax payable (and no refund!). However, to obtain this larger credit the estate must disclose, and document the value, of the decedent’s worldwide assets at the date of death.

Marital Tax Credit

A potential marital tax credit is also provided in some treaties, based on the extent to which the U.S. assets subject to U.S. estate tax pass to the surviving spouse.  Examples of treaties containing that provision include those with Canada,[19] Germany,[20] and France[21].

Excluded Assets

Some treaties restrict the U.S. taxing rights to certain assets stipulated in the treaty.  Some potential examples include the treaties with the United Kingdom,[22] Germany,[23] and Denmark[24]. One result is that in some relevant situations, the shares of U.S. corporations would not be subject to U.S. estate tax.

U.S./U.K. Treaty Limitation on U.S. Estate Tax

An unusual provision in the U.S. estate tax treaty with the United Kingdom limits the U.S. estate tax to the amount of U.S. estate tax that would have been payable if, immediately before the death, the individual had been domiciled in the U.S.[25].    Thus, for example, the estate of any eligible U.K. decedent would normally be zero if no prior U.S. taxable gifts had been made, and the decedent’s worldwide assets did not exceed the estate tax exemption available to a U.S. citizen for that particular year.

Net Basis Taxation on Certain Encumbered Assets

When a U.S. asset is encumbered with recourse debt, the gross value of the asset is still normally subject to U.S. estate tax, and relief is only available by claiming a proportionate deduction from the total gross estate, after disclosing and documenting the value of, the worldwide assets.  However, the treaty with Austria, for example, permits a full deduction from the gross estate for recourse debt.[26]

How AbitOs Can Help

At AbitOs, we specialize in navigating the complexities of international tax for our diverse clientele around the globe. With a deep understanding of U.S. estate tax laws and the nuances of international tax treaties, we offer tailored solutions that minimize tax liabilities and ensure compliance across multiple jurisdictions. Whether you’re a U.S. resident or a global citizen with assets in the U.S., our team of experienced professionals is here to guide you through every step of your estate planning journey, protecting your legacy and optimizing your tax strategy.

[1] The term “nonresident” that is used in U.S. estate tax law has a different meaning than the term “nonresident” that is used in U.S. income tax law.  For estate tax, “resident” refers to the concept of “domicile”, which is not precisely defined in the U.S. tax law, but which is generally considered to denote a more permanent status than income tax residency. 

[2]But see Tax Treaties, Excluded Assets, below

[3] For example, in the case of Canadians, this could include U.S. stocks held in an RRSP or RRIF

[4] IRC 2104(a)

[5] IRC 6018(a)(2)

[6] IRC 2203, Reg. §20.2203.  This may the case also if U.S. probate is not required because the U.S. asset is governed by a Quebec Notarial Will

[7] IRC 2002 and US Code 3713(b)

[8] IRC 6321

[9] IRC 6324(a)(1)

[10] IRC 6324(a)(2)

[11] IRC 6901

[12] IRC 1014(f)

[13] This is the source of the $60,000 “exemption” from estate tax mentioned above

[14] U.S./Canada Income Tax Treaty Article XXIXB(2)

[15] U.S./Germany Estate and Gift Tax Treaty Article 10(5). The rules under the German treaty are slightly complex

[16] U.S./Finland Estate Treaty Article IV

[17] U.S./Switzerland Estate Tax Treaty Article 3

[18] $500,000 divided by $5,000,000

[19] U.S./Canada Income Tax Treaty Article XXIXB(3)

[20] U.S./Germany Treaty Article 10(4).  The rules are complex

[21] U.S. France Estate and Gift Tax Treaty Article 11

[22] U.S./U.K. Estate and Gift Tax Treaty Article 5(1)(a)

[23] U.S./Germany Estate and Gift Tax Treaty Article 9

[24] U.S./ Denmark Estate and Gift Tax Treaty Article 8

[25] U.S./U.K. Estate and Gift Tax Treaty Article 8(5)

[26] U.S./Austria Estate and Gift Tax Treaty Article 8