Owning US Assets From Abroad? The Estate Tax Rule Your Family Should Know
A person does not have to live or die in the United States for US estate tax issues to arise.
Consider a foreign investor who lives abroad but owns shares of US companies, a vacation home in Florida, or other property located in the United States. When that person dies, the family may assume the estate has no US filing obligation because the decedent was not a US citizen or resident.
That assumption can be costly.
If a person who was neither a US citizen nor domiciled in the United States dies owning more than $60,000 of certain US assets, the executor may be required to file Form 706-NA, the US estate tax return for a nonresident who was not a US citizen. The estate may also be subject to US estate tax at graduated rates ranging from 18% to 40%.
The $60,000 threshold is much lower than the estate tax exemption available to US citizens and residents, which is currently $15M per individual. As a result, even a relatively modest US investment portfolio can create a filing requirement and, depending on the available deductions, credits and treaty benefits, a potentially significant estate tax liability.
The First Question: Where Was the Decedent Domiciled?
Before determining which estate tax return may be required, the executor must establish the decedent’s citizenship and domicile at the date of death.
For estate tax purposes, domicile is not always the same as immigration status or income tax residency. It generally depends on where the person lived and whether the person intended to remain there. A green card, visa, or history of filing US income tax returns may be relevant, but no single factor necessarily decides the answer.
If the decedent was a US citizen or was domiciled in the United States, Form 706 may apply, and the worldwide estate must generally be considered. If the decedent was neither a US citizen nor domiciled in the United States, Form 706-NA may apply to the decedent’s US-situated property.
Which Assets Count as US-Situated Property?
The answer depends on the type of asset, not simply where the account or paperwork is located. Common US-situated assets may include:
US real estate,
Tangible personal property located in the United States,
Stock issued by US corporations,
Cash held within a US brokerage account (not bank account),
Certain retirement accounts, and
Certain assets connected with a US trade or business.
Other assets may be treated as located outside the United States, including certain bank deposits, qualifying portfolio debt and life insurance proceeds on the decedent’s life.
Brokerage accounts deserve particular attention. A foreign brokerage account may hold stock issued by US corporations, foreign corporations, cash and other investments, each of which may receive different estate tax treatment. The executor should review the individual holdings rather than relying only on the account’s total value or location.
State Estate or Inheritance Tax May Also Apply
The federal estate tax analysis is only one part of the review. Depending on where the decedent owned property, where the decedent was domiciled, and who inherits the property, the estate or beneficiaries may also have state estate tax, inheritance tax, or reporting obligations.
For example, ownership of real estate or tangible personal property in a particular state may create a state filing requirement even when the decedent lived outside the United States. State exemption amounts, tax rates and filing deadlines vary, and a state return may sometimes be required even when no federal estate tax is due. Potential state obligations should be reviewed separately from the Form 706-NA analysis.
Deductions and Treaty Benefits Can Change the Result
After identifying the US-situated gross estate, the executor must determine which deductions and credits are available. Depending on the circumstances, deductions may be available for debts, mortgages, estate administration expenses, charitable transfers, and certain transfers to a surviving spouse.
The United States also has estate or death tax treatieswith a limited number of countries. An applicable treaty may provide a larger credit, change how certain assets are classified, or reduce double taxation. Treaty benefits are country-specific and should not be assumed to apply automatically.
When Is Form 706-NA Due?
Form 706-NA is generally due nine months after the date of death. The executor may request an automatic six-month extension to file using Form 4768, but an extension to file does not automatically extend the time to pay. Any expected tax generally should be paid by the original nine-month deadline to limit interest and penalties.
US financial institutions may also restrict or delay the transfer of assets until the estate’s US tax obligations have been addressed. Depending on the circumstances, the executor may need an IRS transfer certificate or written confirmation that one is not required. For that reason, the filing review should begin well before the deadline.
How Arc Advisors Can Help
A foreign estate involving US assets may appear straightforward at first. In practice, the analysis can involve domicile, asset situs, valuation, deductions, treaty positions and state tax exposure.
Arc Advisors works with executors, families, attorneys, and foreign advisors to evaluate whether Form 706-NA is required, identify the US assets included in the estate, review available deductions and treaty benefits, prepare the federal return, and assist with related transfer certificate matters.
If you are administering a foreign estate with US investments, real estate or business interests, contact our team to discuss the estate’s filing requirements and next steps and download our estate tax guide.
ESTATE TAX FOR NON-RESIDENTS AT A GLANCE
Federal filing threshold: More than $60,000 of certain US-situated assets
Potential federal tax rate: 18% to 40%
General filing deadline: Nine months after the date of death
Possible filing extension: Six additional months, but payment is generally still due at nine months
Other considerations: State estate or inheritance tax and possible transfer certificate requirements
