Estate Tax Exemptions for Non Resident Non Citizen


I have some questions that are specific to estate tax for Non US Residents /
Non US Citizens (let's call such a person an NRNC). Let's NOT go into
probate or income taxes in this thread.
In doing some initial research, my first great shock was to find out that
starting in 2011 an NRNC owes US estate tax on any US Situated holdings in
excess of $60K. Unlike US Citizens who get the $1M lifetime gift tax
exclusion (or whatever that exclusion will be under future laws), the NRNC
by default have only $60K of exclusion before getting hit with very high
estate taxes. So an NRNC with a US bank account, or holding US stocks, has
potential estate tax on those.
Of course as usual there are exceptions. Some of these are what I wanted
clarification on:
- Apparently stocks of US corporations are subject to estate tax, even if
those shares are held *outside the US*, if those shares are held in the name
of the NRNC. But stocks of foreign corporations are an exception. Can
others confirm that if an NRNC holds foreign stocks in a US brokerage
account that they are not subject to estate tax on those shares?
- Bank deposits: here I am simply confused. The law appears to be written
that bank deposits of an NRNC are subject to estate tax unless the interest
from those deposits would be exempt from US income tax under Section
871(i)(1). So would an ordinary bank account at a US bank held in the name
of an NRNC be exempt or not, for a cash deposit?
- Certificates of deposit in a US bank: Apparently these are exempt from
estate tax for an NRNC?
- Cash deposits in a brokerage account: Apparently these are not "bank
deposits" because brokerages are not banks. Are such cash deposits held in
the name of an NRNC subject to estate tax?
- Portfolio debt: this includes things like bonds, debentures, and notes.
The law says that if the interest from the portfolio debt obligation is
exempt from US income tax, then the debt obligation is deemed not located in
the US. So using the case of an NRNC who holds a US brokerage account in
her own name and buys bonds of a public US corporation, are those bonds
considered exempt from estate tax, since the interest paid on those bonds is
exempt from US income tax to an NRNC?
In general, I come away from the first pass at this thinking that these laws
are completely random. There are huge estate tax implications for seeming
random arrangements of assets for an NRNC that holds assets inside the US.
For a person with inconsequential assets, it is inconceivable that the NRNC
will ever understand these laws well enough to plan for them. For a person
with a really small estate, it's unlikely that even the planner they use
would fully dig into every detail of these laws because of all of the twists
and turns and landmines. It's clear to me the reason for the Form 3520
disclosure rules is as much about catching innocent people as it is about
catching deliberate evaders. The IRS must make a fortune following up on
people who file 3520s since there is likely some aspect of the NRNC's US
based assets that will be subject to estate tax, unless the person exercised
extraordinary care up front.
Reply to
W
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.
Reply to
Alan
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.
Reply to
Alan
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.
Reply to
W
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.
Reply to
Simon Baldwin
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.
Reply to
Alan
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?
Reply to
PeterL
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?
Reply to
W
Yes.
And if yes would
US federal obligations are portfolio debt and are not subject to estate tax for an NRA.
Reply to
Alan
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.
Reply to
W
I wanted to follow up on my original thread regarding estate taxes for Non Resident Non Citizens (NRNC):
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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.
Reply to
W
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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.
Reply to
Alan
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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?
Reply to
W
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.
Reply to
Stuart A. Bronstein
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.
Reply to
Alan
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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.
Reply to
Alan

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