Estate Tax Exemptions for Non Resident Non Citizen

That is my understanding. Only stock in a US Corporation is subject to estate tax even if the shares are held outside the US or in a nominee name.

Bank accounts in the US that are not related to a business or trade operated in the US are exempt. This includes a bank CD as that is a bank account.

Yes.

Portfolio debt instruments that throw off interest are exempt regardless of the physical location of the notes or bonds.

How is real estate treated?

It is a countable asset for estate tax purposes if it is located in the US.

What law introduced these new rules you speak of?

Economic Growth & Tax Relief Reconciliation Act of 2001 (PL 107-16). The same act that altered the estate taxes and rates through 2009; repealed the tax in 2010; and brings it back to life in 2011.

So putting these two facts together, how should an NRNC hold her cash balance in a US situated brokerage account (NOT bank) in order to avoid estate tax?

It looks like rolling over cash balances in 30 day Treasury bills would be sufficient to guarantee that cash is in a portfolio debt instrument, since any Treasury (bill, note, or bond) has a precise maturity and always pays interest.

Where it gets more ambiguous / dangerous is holding cash in the default "money market funds" that most brokers use as a default resting place for cash. One could argue that these are actually more like a perpetual stock or mutual fund that pays a dividend. They don't have precise maturity dates that are usually an essential part of a note or bond. At least you would have to carefully examine the terms of such money markets and if those changed over time assets could be put at risk.

I've looked into these same laws with regard to my own circumstances, and I broadly agree with your assessment here. I would not have been so polite, though.

US estate tax rules are, unsurprisingly, not widely understood by NRNCs, it seems. I'm in the UK, and my UK online brokerage account happily supplies a seamless link to several US exchanges for me, should I wish to buy US stocks directly. There is scant warning of any potential problem; a link to W8-BEN form is as far as it goes. Much the same is true of companies offering NRNCs the opportunity to buy US real estate. Nobody I know would consider for a moment that holding modest amounts of such assets would expose them to US estate taxes and, even more bizarrely, US gift taxes.

One observation. If the NRNC lives in a treaty country, the treaty may limit the reach of the US estate tax somewhat. So the result may not always be as bad as it might at first appear. A treaty might well allow ordinary bank accounts to be excluded, for example

My guess, though, is that the US estate tax has a cooling effect on the willingness and ability of NRNCs to invest in US assets, but that this effect is muted by the fact that it's written in a totally muddled and obscure way, and perhaps partly also blunted by some tax treaties. In this regard, there could actually be positive consequences for NRNCs from the FATCA provisions of the recent HIRE act; if FATCA withholding turns NRNCs further away from direct US investments, this has the happy side-effect of also reducing the hidden danger of rapacious US estate taxes.

Many brokers also own a bank. E.g., Charles Schwab. They even allow you to link the brokerage account to the bank account such that sweeping the loose cash from the brokerage account to the bank account is an instant transaction during business hours.

Even if your broker does not own a bank, it is highly likely that money can be electronically transferred out of the brokerage account to any bank account. E.g., Charles Schwab brokerage accounts have a routing number and account number that can be used to transfer funds to any bank account.

I don't get the logistics of this. If a foreigner who lives outside the US dies, how would the US even know about this? If this person holds US stocks in a brokerage outside the US, in what court would the US go after this portfolio for any estate tax?

That's clear, but the amount you can insure as cash in a bank account is less than what can be insured in stocks and bonds in a brokerage account. Most brokers have some kind of insurance for up to $1M in stocks and bonds. I think FDIC limits on cash in a bank account will eventually go back to $100K.

And, it is a hassle to transfer money between different accounts.

Back to the tax question: would 30 day or 90 day US treasury bills held in a brokerage account be counted as a portfolio debt instrument (because it throws off interest at time of repayment of principal)? And if yes would holding cash in US treasury bills - inside a brokerage account - avoid an estate tax on that cash for an NRNC?

Yes.

And if yes would

US federal obligations are portfolio debt and are not subject to estate tax for an NRA.

Foreigner NRNC dies and leaves $200K in a foreign brokerage account to his brother, a US citizen.

US citizen files a 3520 to declare the inheritance from an NRNC.

IRS audits the 3520 and during audit asks for a copy of the brokerage account statements.

IRS finds that foreign brokerage account was holding $100K in US stocks and demands payment of an estate tax on that.

I assume that is the way it might work in practice.

I wanted to follow up on my original thread regarding estate taxes for Non Resident Non Citizens (NRNC):

A stock of a US corporation held by a NRNC is subject to estate tax, regardless of whether that stock is held in a US brokerage account or outside the US. Now I would like to narrow down exactly what constitutes a stock of a US corporation. To avoid a repeat question from the original thread, this rule is contained in the Economic Growth & Tax Relief Reconciliation Act of 2001 (PL 107-16).

First, I want to consider the location and source of income of a business. Consider these four cases:

1A) Company is headquartered in US, and LESS than 50% of the company's income derives from inside the US (e.g., most of business is transacted in Asia or Europe) 1B) Company is NOT headquartered in US, and LESS than 50% of the company's income derives from inside the US 1C) Company is headquartered in US, and GREATER than 50% of the company's income derives from inside the US 1D) Company is NOT headquartered in US, and GREATER than 50% of the company's income derives from inside the US

If a NRNC holds stock of these four types of companies, which is subject to US estate tax?

Second, I want to consider the nature of the stock itself. A foreign corporation can have its stock traded in the US in one of the following ways:

2A) Stock can be registered on a US exchange, specifically registered on NYSE or NASDAQ 2B) Stock can trade as a delisted stock on US pink sheets 2C) Stock can trade on either registered (NYSE) or unregistered (pink sheets) as an ADR, offered on a US exchange through a US bank that sponsors the shares 2D) Stock can trade as a foreign ordinary share, directly in a foreign country. Many brokers these days are able to trade foreign ordinary shares for a US brokerage account.

If a NRNC holds stock in a US brokerage account does it automatically become subject to estate tax if it is types 2A, 2B, or 2C? If for example the NRNC buys the stock of a foreign corporation that happens to have a registered stock symbol in the US (e.g., the Chinese mobile phone company China Mobile trades on NYSE as the symbol CHL), does it become a "US Stock" for purposes of estate tax simply because the stock registration is US based?

While I realize some of you will be incredulous that the US appears to want to tax non resident foreign citizens at time of death simply because they own a US stock, that does in fact appear to be the intent of these laws. Therefore understanding all of the tedious details I am posting becomes necessary if you want to understand what holdings of a NRNC are subject to this estate tax.

The law applies to stock of a domestic corporation. A domestic corporation is one that obtained its charter in one of the 50 states or the District of Columbia. Where the company is located, does business, obtains income, has its employees, etc. is not relevant.

Therefore, the answer to all of your examples only depends upon where the corporation that issued the securities obtained its charter.

What if the corporation was formed in the US, but then moved to another country?

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Don't most foreign corporations doing business in the US have a US formed subsidiary? So in your formation of things all that matters is where the

*parent* corporation was formed?

A subsidiary is a generally a corporation wholly owned by the parent corporation. It normally does not have outside shareholders. So if a noncitizen, nonresident of the US has stock in the parent corporation, there would be no estate tax on that because the US government would have no jurisdiction to impose tax in that case.

If the foreign person actually owned stock in the US subsidiary, the US government might well have the power of impose tax on the US corporation.

And of course if a US citizen or resident has stock in a foreign corporation, by virtue of their citizenship or residence the US governement would also have the right to impose the tax.

I have no idea what you mean by "moved". If NRNCs hold stock issued by a domestic corporation, they are subject to estate tax law. If the domestic corporation goes through some form of transformation and ceases to be a domestic corporation and the NRNC winds up holding stock in a foreign corporation, then the NRNC would not be subject to estate tax law on those holdings.

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All that matters is at the time of death, of which corporation is the decedent a shareholder. If it is a domestic corporation, then the estate would be subject to estate tax law.