UNITED STATES TAX ISSUES

If a Bermudian calls us with a U.S. tax question it is usually with respect to income tax or more commonly the withholding tax imposed by the Internal Revenue Service with respect to dividends or other fixed or determinable income being paid to a non-U.S. person. But we hardly ever get questions about U.S. estate tax that could have a far greater impact on a Bermudian or other foreign national than U.S. withholding tax.

Foreign Nationals and U.S. Estate Tax

The U.S. Federal estate tax is imposed on the transfer of a person’s property at the time of a person’s death. The gross estate of a U.S. person or resident decedent includes the value of all property; real or personal, tangible and intangible, wherever situated. The word “person” is not defined as applying to only a U.S. citizen or resident. A non-U.S. person who has U.S. situs assets at death is subject to U.S. Federal estate tax.

For a Bermudian or other foreign nationals U.S. situs property commonly refers to a residence or other living accommodation owned in the United States and the ownership of U.S. stocks, bonds or other financial instruments. The situs of a house, condominium or timeshare is straight forward in that it either is or is not in the United States. If you own 5,000 shares of Citibank that has a fair market value at death of $75,000 you have a U.S. situs asset. It does not matter whether the stock certificate is in shoe box in your closet, your HSBC safe deposit box or only exists as a line item in the monthly/quarterly statement that you receive from your local investment advisor. We have had people argue with us that the stock was really bought in the name of their local broker and that they do not really own the stock that it is just allocated to them. Such argument is superficial in that the Internal Revenue Service has “look through” rules that readily identify the owner of the stock. Basically, if it is in your account you own it.

In conversations with local banks and investment advisors we inquired as to whether they advise Bermuda nationals who would like to buy U.S. stock for their portfolio whether they counsel the Bermudian about U.S. estate tax. The answer was commonly “no.” When we asked advisors who have permission to buy stock for the client’s portfolio whether they took into consideration that they were exposing their client to U.S. Federal estate tax the common answer is that they were financial advisors and did not know the tax laws of all countries in which they purchased stock on a client’s behalf.

The U.S. Federal estate tax ranges from 18% on the first $10,000, 30% at $100,000 and 40% on assets over $1,000,000. A foreign national can only exclude $60,000 of U.S. situs assets from estate taxation.

This issue is one we usually find out about after a person dies and the executors discover that they are unable to transfer ownership of the ski condo or a mutual fund until the deceased receives “tax clearance” from the Internal Revenue Service. Recently, after heirs ruefully learned that that the estate had to pay hundreds of thousands of dollars to the Internal Revenue Service I was asked if this could have been avoided? The answer is yes, with proper tax planning. The lesson to be learned is that if you intend to invest in any U.S. situs asset that before you do so you should seek U.S. tax advice.  

Are You A U.S. Citizen and Don’t Know It?

The above is the title of a seminar conducted by Steve Trow of Trow Law in Washington D.C. and me at the Bermuda Chamber of Commerce on a few occasions over the last few years. I again bring this subject up as a result of another recent deceased Bermudian who had a similar fact pattern to the above example. However, when questions were asked as to how the children were U.S. citizens and not the deceased it was eventually discovered that the deceased was a U.S. citizen via a grandparent. Hence, the global estate of the deceased was then subject to U.S. estate tax and the issue of how many back years U.S. income tax returns have to be filed is still being negotiated. If you are a Bermudian or other foreign national and there are any U.S. citizens in your family tree going back 4 generations you should ascertain whether you have a U.S. tax issue rather than leaving your heirs an unwelcome surprise.

Pursuant to the requirements relating to practice before the Internal Revenue Service, any tax advice in this communication is not intended to be used, and cannot be used, for the purpose of (I) avoiding penalties imposed under the United States Internal Revenue Code, or (ii) promoting, marketing or recommending to another person any tax related manner.

The tax advice given by this column is, by necessity, general in nature. You should, of course, check with your own U.S. tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances.