July 30, 2013

Estate tax for nonresident non-U.S. citizens

The estate tax applies to all U.S. situs property regardless of whether the owner is a U.S. citizen or not. The key though is that the applicable exclusion amount is much different for a U.S. citizen than a non-resident non-U.S. citizen. For example, the threshold amount for a U.S. citizen in 2013 is $5.25M. In contrast, the threshold amount for a nonresident non-U.S. citizen in 2013 is $60,000. Obviously this is a massive difference in terms of dollar amounts.

The term "situs" refers to where the property is legally situated. For instance, stock of a U.S. corporation is deemed to be a U.S. situs asset even if the owner is a non-resident non-U.S. citizen. In Estate of Charania v Shulman (8th Cir 2010) 608 F3d 67, the decedent owned stock in Citigroup and was a citizen of the United Kingdom while residing in Belgium (yes, confusing). Since the Citigroup was a U.S.-based corporation, the 250,000 shares of Citigroup were included in the decedent's estate for U.S. estate tax purposes. Since the the stock was worth $11.79M, a large tax bill was owed to the IRS.

A common scenario where the estate tax for the nonresident non-U.S. citizen might come into play involves a moderately wealthy tourist or visitor to the U.S. This individual frequently vacations in the U.S. and grows weary of staying at hotels. They decide to invest in a vacation home. Since the U.S. generally does not place restrictions on the inflow of capital to the U.S., the purchase of a home by a nonresident non-U.S. citizen is not especially difficult. The one notable issue might be the subject of financing as a lender might be leery of extending credit to a nonresident non-U.S. citizen. Still, this individual can make an all-cash offer for a home if lending becomes too problematic.

Since the value of real estate is quite high in many places especially tourist destinations, it is likely that the tourist's estate will exceed $60,000. By eclipsing the $60,000 threshold, the tourist's potential U.S. estate becomes subject to the federal estate tax. This assumes that the tourist never sells the home prior to passing.

Whereas California is a haven for tourists and therefore their money, it is probably that an appreciable amount of the estates will be subject to the federal estate tax even if they really have no connection to the U.S. The only connection they have to the U.S. is that they own an asset with a U.S. situs. Logically then, a prudent person would want to plan for this. However, the first step is knowing that such a tax exists and for whatever reason, many people do not know about it. That probably explains why I devoted a blog post to it.