US Estate Tax Issues for Non-Citizen, Non-Residents
An increasing number of non-US citizens (and their heirs) have been surprised to discover that, absent treaty relief, the estate tax exemption for non-citizen, non-residents in the US only applies to the first $60,000 in assets, as compared to an exemption of almost $5,500,000 for US citizens and residents in 2017. The US estate tax only applies to non-citizen, non-residents with respect to their US-situs assets at death. However, stock in a US corporation is a US-situs asset, again absent treaty relief. Therefore, the general rule is that if a non-citizen, non-resident dies owning more than $60,000 of stock in a US corporation, US estate tax will apply. US corporations will refuse to transfer the stock until they receive a transfer certificate from the IRS confirming that the estate tax has been paid.
One solution is to place the US stock in a foreign holding company that is viewed as a corporation for US tax purposes, either because it is a per se corporation for US tax purposes or through a check-the-box election. If a non-citizen, non-resident owns a foreign corporation that in turn owns stock of a US corporation, the fact that the foreign corporation owns some US stock will not result in it being considered a US-situs asset.
Another option is to use lifetime gifts. Unlike estate tax, gift tax does not apply to a transfer of US stock from a non-citizen, non-resident. If the recipient is or could become a US citizen or resident, gifting can have a downside, as the recipient inherits the income tax basis of the donor for income tax purposes. In comparison, property received at death receives a "stepped-up" basis equal to the fair market value at death. If the property is later sold and is subject to US income tax as a result of the sale, the income tax basis will be critical in determining the amount of the tax, and a higher income tax basis will result in lower tax liability.
Following is a link to the IRS listing of countries with respect to which an estate and/or gift tax treaty is currently in place
. Some treaties provide that US stock is not a US-situs asset, and most treaties provide for some adjustment to the unified credit. For example, a treaty may provide that the US estate tax credit is a percentage of the credit available to US citizens. The percentage would be the value of the decedent's US estate versus the value of the decedent's worldwide estate. Of course, it is important to consult the particular treaty rules as applicable to a given country before drawing any conclusions in this regard.
Please contact a member of the HSB Economic Development team if you have any questions about structuring entity ownership in a manner that minimizes US estate tax liability.