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US Estate Taxes & Death Duties – When Do They Apply?

If you are a US citizen living abroad, be warned – there can be significant tax implications on your estate despite residing in another country. If you’re concerned about keeping your tax obligations under control when you finally pass on and will your possessions to your loved ones, you need to know what to expect.

This is especially significant since Australian citizens don’t pay taxes on estates (and haven’t since the abolition of Australia’s estate tax laws in 1979). If you’re a US citizen living in Australia, you might be persuaded to think its the same for you – but not so.

This is because neither where you live (or are domiciled), nor where your assets are located, affect the actual amount of tax paid on your estate if you are a US citizen. Rather, it’s your citizenship that counts, and citizenship alone.

However, US citizens aren’t the only individuals liable for US estate tax. Let’s look at exactly to whom and when these taxes apply.

Do US Estate Taxes Apply To Me?

For sake of definition, US federal estate tax is essentially a tax upon the transfer of property at death, with the tax payable by the executor of the estate. When the estate is transferred, US federal estate tax is imposed upon the taxable estate – based on worldwide assets regardless of domicile – of every US citizen and US resident upon their death that exceeds the relevant estate tax exemption threshold (more on this in a moment).

Also, subject to estate and gift treaties (taxation agreements between nations), non-resident aliens (i.e. any non-US citizen not living in the US) who own property in the US must also file federal estate tax returns for any US-situated (or US situs) assets exceeding the value of $US60,000. (Australia’s treaty with the US includes partial exemptions or pro-rata credits for estate taxes for non-resident aliens, but that’s beyond the scope of this article.)

US situs assets subject to estate tax include:

  • US real property;
  • Tangible personal property located in the US; and
  • Securities in US companies.

Assets exempt from US federal estate tax include:

  • Securities that generate portfolio interest;
  • Bank accounts not used in connection with trade or business in the US; and
  • Insurance proceeds.

Note that money market accounts and brokerage accounts are not exempt from US federal estate tax.

When Exactly Do US Estate Taxes Apply?

So, the estate tax exemption threshold. This is an upper limit that defines the value above which an estate becomes taxable. Commencing 1 Jan 2019, the current threshold is US$11.4M, recently enacted under the Trump administration via the Tax Cuts and Job Act 2018 (TCJA). Only the portion of estates that exceed this value will be taxable, at least for now.

It’s worth noting that this threshold under the TCJA will expire at the end of 2025 (unless Congress acts to renew it) at which time the threshold will revert to the 2017 level of US$5.49M (indexed for inflation). Moreover, with the next US federal election not far off, there is no guarantee that the threshold will not be changed under a different administration.

Estate Tax or Inheritance Tax?

As a clarification, there is a distinction between estate tax and inheritance tax, namely, estate taxes are paid by the executor of a taxable estate, whereas inheritance taxes are paid by the beneficiary of the estate. As it stands, only six US states impose inheritance taxes, namely:

  • Iowa
  • Kentucky
  • Maryland – lowest rate of 10%
  • Nebraska – highest rate of 18%
  • New Jersey
  • Pennsylvania

Additionally, approximately 30% of US states also impose their own estate taxes, also payable by the executor.

Married Couple Thresholds & Unlimited Marital Deduction

In 2019, a married couple who are both US citizens have a combined exemption threshold of US$22.8M. On the passing of one of them, the estate may elect to transfer any deceased spousal unused exclusion (DSUE) amount to the surviving spouse (termed Portability Election). Ultimately, this allows married US couples to avoid paying estate taxes despite the death of one spouse as long as the estate’s value remains below the combined threshold.

Additionally, the unlimited marital deduction is a provision of the IRS that allows married couples to make unlimited transfers of property between spouses without incurring tax, either during their lives or upon their deaths, thereby reducing the taxable estate of the donor spouse. (However, again, this is only available when both spouses are US citizens.)

Jointly Held Property – US Citizen and Non-US Citizen Spouse

Upon the death of a US citizen, all worldwide property held jointly by the US citizen and their surviving non-US citizen spouse is considered by the US to belong entirely to the estate of the deceased (except to the extent that the executor can substantiate the contributions of the non-US citizen spouse to the acquisition of the property). This means even if the property is in another country, if it is jointly held with a US citizen, the property may be subject to estate tax if the value exceeds the exemption threshold.

On the death of a non-US citizen, the estate of that person will be taxed on their US-situated property owned solely by the decedent (deceased), and where jointly held with their US-citizen spouse, half of the value of the jointly held US-situated property will be included in the taxable estate of the non-US citizen decedent.

2019 Estate Tax Rates

Here’s what you’ll pay if your estate exceeds the exemption threshold:

Taxable estate above the exemption threshold – $USTax rate
$0$10,00018%
$10,000$20,000 20%
$20,000$40,000
22%
$40,000$60,000
24%
$60,000$80,000
26%
$80,000$100,000
28%
$100,000$150,000
30%
$150,000$250,000
32%
$250,000$500,000
34%
$500,000$750,000
37%
$750,000$1M
39%
Greater than $1M40%

Strategies for Dealing with Estate Tax

Various strategies exist for dealing with and minimising estate taxes for decedents, and ensuring asset protection and creating income streams for beneficiaries. These will be discussed further in a future article.

Would you like to know how to manage and minimise your US estate tax obligations, or protect your assets as a beneficiary? Contact us today for a friendly, no-obligation discussion about your situation, and take advantage of our personally tailored financial advice.

This material has been prepared for informational purposes only, and is intended for general information purposes only and should not be used as a substitute for professional advice. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this advice you should consider the appropriateness of the advice, having regard to your own objectives, financial situation and needs.

Back9 Capital Management Pty Ltd disclaims all and any guarantees, undertakings and warranties, expressed or implied, and shall not be liable for any loss or damage whatsoever (including human or computer error, negligent or otherwise, or incidental or consequential loss or damage) arising out of or in connection with any use or reliance on the information or advice on this site. The user must accept sole responsibility associated with the use of the material on this site, irrespective of the purpose for which such use or results are applied. The information on this website is no substitute for financial advice.

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