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Key Takeaways
- Non-U.S. individuals residing, working, or investing in the U.S. may be considered “non-citizens not domiciled” (NDA) for estate and gift tax purposes.
- Proper planning can help reduce estate tax burdens for NDAs.
- Foreign business owners with significant U.S. investments should beware of unwanted tax consequences when considering estate planning.
Many cross-border families and individuals with multiple nationalities live, work, and invest in the United States. These families and individuals need tailored gift and estate plans to alleviate tax burdens, protect loved ones, and provide clear instructions to their family members and friends.
Here are answers to some common questions about international estate planning.
#1: Why should I prioritize U.S. estate and gift tax planning if I am not a U.S. citizen?
While a non-U.S. person may be classified as a resident alien for immigration and income tax purposes, they could also be considered a non-citizen not domiciled (NDA) in the United States for estate and gift tax purposes.
You are an NDA if you intend to stay in the U.S. for a period of time.
For U.S. income tax purposes, a foreign investor will typically only be subject to income tax on U.S. sourced income (rather than worldwide income) if they are not a U.S. citizen, green card holder, or U.S. tax resident. The U.S. federal income tax rates on various types of taxable income are the same as those applicable to U.S. citizens or residents. Reduced withholding and tax treaty benefits can lessen the tax impact with proper planning.
U.S. domiciliary versus NDA is an important distinction.
- Taxable estates of NDAs are subject to the same U.S. federal estate and gift tax rates as a U.S. domiciliary.
- A U.S. domiciliary has an inflation-indexed exemption of $13,610,000 for 2024.
- The exemption available to an NDA is limited to only $60,000, not indexed for inflation.
This significant disparity between the exemptions for a U.S. domiciliary and NDA means planning for U.S. estate and gift tax is crucial.
#2: How does the U.S. federal estate and gift tax work for an NDA?
Gift Tax
NDAs are subject to U.S. gift tax only on gifts of U.S. situs real property and tangible personal property. The annual exclusion of $18,000 (indexed for inflation) per donee for gifts of a present interest in 2024 is available.
In the case of a gift to an NDA spouse or non-citizen spouse, an exclusion of up to $185,000 (indexed for inflation) is available for 2024.
Unless a gift is fully eligible for the $18,000 or $185,000 exclusion, most cash gifts by NDAs can be done outside the U.S. to avoid this tax. If the cash intended to be gifted is already located in the U.S., there may be planning opportunities to help mitigate this tax.
If an NDA makes a taxable gift, Form 709 must be filed.
Estate Tax
The estate of an NDA is subject to U.S. estate tax only on U.S. situs assets. The tax is assessed at the same rates as for a U.S. domiciliary, ranging from 18% to 40%, except that an NDA is eligible for an exemption of only $60,000 (instead of $13,610,000 for a U.S. domiciliary).
Generally, U.S. tax law unifies the gift and estate tax, meaning, in general, all taxable gifts a person makes during their lifetime are lumped together and included for estate tax exemption purposes.
The following items can reduce the estate tax owed by an NDA:
- Appropriate fraction of funeral and estate administrative expenses, claims against the estate, mortgages, and liens on included property.
- Charitable contributions to U.S. charities.
- If the surviving spouse is not a U.S. citizen, the marital deduction is not available unless granted by a U.S. estate tax treaty or conveying property through a Qualified Domestic Trust.
- Credits for U.S. federal gift tax paid.
- A unified credit of $13,000 (equivalent to a $60,000 exemption) unless a greater amount is allowed by the relevant treaty.
In addition to the gift and estate tax, the Generation Skipping Transfer Tax (GSTT) can also apply to NDAs. This tax covers any generation-skipping transfer of U.S. situs property. Generation-skipping transfers are gifts and transfers to unrelated persons over 37.5 years younger than the donor or to related persons more than one generation younger than the donor, such as grandchildren. Both outright transfers and contributions to trusts could be subject to GSTT.
Because the U.S. estate tax exemption for NDAs is as low as $60,000, most NDAs owning U.S. situs properties outright, even in modest amounts, are subject to U.S. estate tax.
For example, without proper planning, a deceased U.S. domiciliary owning a $1,000,000 taxable estate outright in 2024 would not need to pay any estate tax because they are largely below the exemption available ($13,610,000).
A deceased NDA would need to pay an estate tax in the approximate amount of $332,800, because they are significantly above the exemption amount. A properly implemented estate and gift plan could help NDAs avoid part or all the estate tax burdens.
#3: When are U.S. situs properties subject to the U.S. federal gift and estate tax?
The estate of an NDA or the gift made by an NDA is only subject to the U.S. federal gift and estate tax on U.S. situs assets. The list below covers some examples:
| Categories | U.S. Estate Tax? | U.S. Gift Tax? |
|---|---|---|
| Real property located in U.S. (Examples: houses, condominiums) |
YES | YES |
| Tangible personal property located in U.S. (Examples: jewelry, antiques, artwork) |
YES | YES |
| Currency physically in U.S. | YES | YES |
| Shares of stock issued by a U.S. domestic corporation, including shares of U.S. Co-operative. (Example: Apple stocks) |
YES | NO |
| Mutual funds (including Money Market Funds) organized in corporate form incorporated in U.S. | YES | NO |
| Any debt obligations, including a bank deposit, the primary obligor of which is a U.S. Person of U.S., a State of any political subdivision thereof, the District of Columbia, or any agency or instrumentality of any such government. (Example: U.S. state/municipal bonds.) |
YES | NO |
| DOD after 12/31/1972, any debt obligation to the extent that the primary obligor on the debt obligation is a U.S. corporation (Example: U.S. corporate bonds) |
NO | NO |
| Cash deposits with U.S. bank (Examples: Money market accounts with U.S. mutual funds, cash in U.S. safe boxes) |
NO | YES |
| Real property located outside U.S. | NO | NO |
| Tangible personal property located outside U.S. | NO | NO |
| Shares of stock issued by a corporation which is not a domestic corporation | NO | NO |
| Amount receivable as insurance on the decedent's life (Examples: Life insurance cash value, death benefits) |
NO | NO |
| Deposits with a branch OUTSIDE of U.S., a domestic corporation or domestic partnership, if the branch is engaged in the commercial banking business | NO | NO |
| After 7/18/1984, publicly traded bonds qualify as "portfolio debt" (regardless of maturity) | NO | NO |
| Interest in limited or general partnerships that either do business or own assets in U.S. | Most Likely YES | NO |
| Retirement Plan | NO | NO |
#4: I am a U.S. citizen married to a foreign spouse. What are the estate and gift tax exclusion amounts and marital deductions applicable to our situation?
The chart below generally outlines the applicable exclusion and deduction amounts.
| Decedent | Surviving Spouse | Gross Estate | Exclusion Amount (2024) |
Annual Gift Tax Exclusion Amount (2024) |
Marital Deduction | Annual Marital Gift Tax Deduction (2024) |
|---|---|---|---|---|---|---|
| U.S. Citizen | U.S. Citizen | Worldwide Assets | $13,610,000 | $18,000 | Unlimited | Unlimited |
| U.S. Citizen | U.S. Domiciliary | Worldwide Assets | $13,610,000 | $18,000 | Only with a QDOT | $185,000 |
| U.S. Citizen | NDA | Worldwide Assets | $13,610,000 | $18,000 | Only with a QDOT | $185,000 |
| U.S. Domiciliary | U.S. Citizen | Worldwide Assets | $13,610,000 | $18,000 | Unlimited | Unlimited |
| U.S. Domiciliary | U.S. Domiciliary | Worldwide Assets | $13,610,000 | $18,000 | Only with a QDOT | $185,000 |
| U.S. Domiciliary | NDA | Worldwide Assets | $13,610,000 | $18,000 | Only with a QDOT | $185,000 |
| NDA | U.S. Citizen | U.S. Situated Properties | $60,000 | $18,000 | Unlimited | Unlimited |
| NDA | U.S. Domiciliary | U.S. Situated Properties | $60,000 | $18,000 | Only with a QDOT | $185,000 |
| NDA | NDA | U.S. Situated Properties | $60,000 | $18,000 | Only with a QDOT | $185,000 |
#5: Are there non-tax reasons for formulating an estate plan?
Estate planning is the process of anticipating and arranging for the management and disposal of your estate during your life, as well as at and after death. It also involves minimizing gifts, estate, generation-skipping, and income taxes.
A will is part of the estate plan. Depending on the complexity of the situation, an estate planner might use other tools such as trusts, pass-through entities, and life insurance to accomplish your estate planning goals.
Besides tax considerations, some of the most important reasons for estate planning include:
- Passing property to the intended beneficiaries
- Alleviating the burdens of surviving family members
- Protecting the estate assets from unintended recipients
- We break down common estate planning questions. Read more.
As always, careful estate planning can achieve significant tax savings. This is especially true for foreign business owners with significant investments in the U.S. Without professional guidance, disposing, exiting, or transitioning business interests can produce unwanted U.S. tax consequences.
#6: What is the role of a trust in estate planning?
A trust is a fiduciary arrangement allowing a third party, or trustee, to hold assets on behalf of a beneficiary. A properly planned international trust structure can help international families minimize or eliminate the U.S. estate tax, as well as provide important other business benefits.
There are many kinds of trusts, and the most popular type for an NDA is the U.S. situs foreign trust. A U.S. situs foreign trust is generally not subject to U.S. income tax, except for withholding tax on any applicable U.S. source income.
#7: Does it matter if my home country has a tax treaty with the United States?
The U.S. government generally enters into Estate or Gift Tax Treaties with countries with significant transfer taxes to help avoid double taxation. The treaty provisions prevail when foreign laws conflict with any existing U.S. estate or gift tax provisions.
If your home country has an estate or gift tax treaty with the U.S., we first study relevant treaty provisions to determine residence, source of income, situs of assets, and income withholding rates.
Currently, the U.S. has estate or gift tax treaties, or both, with:
- Australia
- Austria
- Canada
- Denmark
- Finland
- France
- Germany
- Greece
- Ireland
- Italy
- Japan
- Netherlands
- Norway
- South Africa
- Sweden
- Switzerland
- U.K.
Additional Considerations
The primary objective for implementing an estate and gift plan is to alleviate or eliminate the abovementioned U.S. tax burdens.
Form 706-NA United State Estate (and Generation Skipping Transfer) Tax Return is due nine months after the death of an NDA owning taxable assets in the U.S. with a FMV over $60,000. If there is no U.S. estate executor, every person in actual or constructive possession of any property of the decedent is liable to file the return.
By the time Form 706-NA is due, it is usually too late to take advantage of any planning opportunities. This is why proactive, strategic estate planning is essential for families with an international presence.
