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Be Wary of This Tax Trap – US Estate Tax for Nonresidents

Did you know that even though you may not be a US citizen, if you are you married to one or inherit property from one, you may be subject to US estate tax? Non-US citizens who live, work, or own property in the US need to have a clear understanding of the implications of US estate tax for nonresidents.

Everyone that holds a green card is subject to US income tax on worldwide income during the entire time that the green card is valid (even if you are living outside the US), regardless of where it is earned. The US imposes strict reporting obligations and will fine people that fail to comply (typically a USD $10,000 minimum penalty).

An individual who is considered domiciled in the US for estate tax purposes is also subject to US estate tax on worldwide assets when they die. An estate tax return is required for a deceased American citizen and this responsibility transfers to their spouse or heirs. Deceased non-residents who were not American citizens are also subject to US estate taxation concerning their U.S. situated assets.

Estates that exceed the tax-exemption limit ($5.49 million for individuals and $11 million for couples) are subject to estate and gift tax. The Internal Revenue Service (IRS) can collect unpaid estate tax from persons receiving a share of the decedent’s property.

To help your beneficiaries avoid unnecessary stress and cost during a difficult time, you must plan what you want to do with your home and other assets before you pass.

US estate tax is a tax on property (cash, American real estate, the stock of US companies, or other assets). A non-resident’s stock holdings in American companies is also subject to estate taxation even though the non-resident held the certificates abroad or registered the certificates in the name of a nominee. The estate tax limits, to a modest degree, the large tax breaks that extremely wealthy households get on their wealth as it grows, which can otherwise go untaxed.

Resident and non-residents may be in the US indefinitely, for a long-term stay, or for a short-term assignment. Upon their death, however, their estates may face adverse US estate tax consequences.

Estate tax treaties between the US and other countries often provide more favourable tax treatment to nonresidents by limiting the type of asset considered situated in the U.S. and subject to U.S. estate taxation. Executors for non-resident estates should consult such treaties where applicable.

Surrendering your green card is one strategy to be considered a non-resident alien for US income tax purposes. This status assignment assumes that you do not spend substantial time in the US after surrendering your green card, in which case you may become a US resident under the “substantial presence” test. Upon surrendering your green card, you will need to consider whether you are subject to the US expatriation tax or “exit tax.”

Non-US citizens who live, work, or own property in the US need to have a clear understanding of the potential implications of the US estate tax rules. Residency and domicile choices can have major tax implications.

At Back9, we have extensive experience with US estate planning and can help you determine any potential impact, as well as develop an approach based on your specific circumstances. Get in touch with us for a confidential discussion.

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