On aspect that U.S. citizens
working and residing outside the United States rarely consider is dying outside
the United States. More likely than not, this will also expose your estate to
foreign “death duties” as well as U.S. estate tax. The U.S. only has estate tax
treaties with 18 countries with 13 of them being in Europe.
Foreign Estate Tax
While a recitement of the foreign
estate tax in each country is beyond the scope of this article it would be
prudent for an expatriate to ascertain if the country in which they reside has
a estate tax treaty with the United States and if not, to obtain local tax
advice as to whether they will be subject to estate tax (death tax) in their
country of residence. We have had experience in the past where a client had
died in a foreign country and said country did not allow the decedent to leave
the country until all “death taxes” had been paid.
U.S. Federal Estate Tax
Under current U.S. estate tax law each
individual can exclude $5,430,000 from U.S. estate tax. For 95% of U.S.
citizens and resident aliens they will never have to worry about U.S. Federal
estate tax. For those who come within the top 5% in assets a change in the law
in 2010 had final regulations published in June 15 explaining how the
portability of the estate tax exemption between spouses works.
For example, if spouse A dies in 2015
with a $3,000,000 estate they have an unused exclusion amount of $2,430,000.
The decedent’s estate can make a portability election to transfer to spouse B
the unutilized exclusion amount of $2,430,000. Spouse B would then have a total
exclusion of $5,430,000 plus $2,430,000 or $7,860,000 in total. As the
exclusion is indexed this amount will likely increase by $50,000 to $100,000 a year.
As mentioned, the unused exclusion does
not automatically transfer between spouses. An election to do so must be made
by timely filing an estate tax return within 9 months after the date of the
decedent’s death. Typically with a large estate an extension of time to file
the estate tax return is requested for a period up to a year. And while the IRS
may grant an extension of time to file the estate tax return the final
regulations specifically state that the IRS may not grant an extension of time
to elect portability.
The hidden trap for the uninformed is
that since spouse A’s estate was less than the $5,430,000 threshold there is no
requirement to file a U.S. estate tax return.
Hence, if you want to make the
portability election the estate tax return must be filed within the 9 month
period after the date of the decedent’s death. Once made, the election is
irrevocable.
State Estate Tax
The majority of States impose on a
decedent an estate tax, an inheritance tax or both on estates starting as low
as $600,000. Each State has different laws as to who the tax is imposed on and
the threshold.
Are Bermuda Nationals Subject To
U.S. Estate Tax?
In certain circumstances the answer is yes. 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 bank 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.
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 U.S. estate taxation.
Can a non U.S. person invest in a U.S. situs asset and avoid
paying U.S. estate tax on their demise? The answer is yes, with proper tax
planning. If you intend to invest in any U.S. situs asset before you do so you
should seek U.S. tax advice.
Bermuda Estate Tax On Foreign Nationals
Bermudian’s usually express surprise when informed that
their U.S. situs property is subject to U.S. estate tax. But the U.S. law
mirrors Bermuda law. I know a person who owns a fractional share in Bermuda has
never seen the unit and has not been to Bermuda in over 40 years. It is simply
an investment. And if the person still owns the fractional unit upon his demise
the Bermuda government will subject his estate to “death duties.”
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