US estate and gift tax: 8 factors to consider as a non-US person

Transfer Taxes are imposed in accordance to the tax status of the donor and the location of assets transferred by the donor, and in this respect, differ from many “inheritance tax” systems. Non-US persons generally do benefit from a small exemption from these Transfer Tax at time of death of USD 60’000. Any US located assets of the deceased which, at the time of death exceeds this exemption, may be subject to the Transfer Taxes. Let’s look at some key factors to bear in mind.

1. Federal Estate Tax  on assets located in the US 

For Federal estate tax purposes, the value of the US gross estate of a non-US person consists only of property (including property that is beneficially owned) that is located, or deemed to be located, in the US at the time of his or her death. Let’s look at some examples:

• Cash in a safety deposit box in the US would generally be in scope. The same applies to special deposits with brokers and non-bank financial firms as well as immovable property.
• Shares in a US company which are owned or beneficially owned by a non-US person at his or her death are deemed to be located in the US.
• The location of the share certificate or the use of agents or nominees does not alter the tax consequences. The rules for debts obligations of a US person or a US corporation are similar to that of US shares. 
• The laws regarding the taxation of a US partnership interest are less clear as they depend on certain facts and circumstances.
• Special rules apply to certain assets and would have to be checked on a case-by-case basis: certain bank deposits, portfolio interest debt instruments, life insurance payable by US insurance companies, patents, trademarks copy rights, contractual rights or jointly held property.

2. Federal Estate Tax have special rules which apply to Trusts

There are also special rules for trusts. For example, if a non-resident decedent is the beneficiary of a non-US trust and has a general testamentary power of appointment over the trust property, which consists of property located in the US (such as shares in a US corporation), such property may fall into the gross taxable US estate of the non-resident deceased.

Similarly, settling a trust (or a foundation in certain instances) with US located assets and retaining a certain level of control over the trust would bring its assets within in the scope of these taxes.

3. Non-US Spouses

Generally, the estate of a US person passing to a non-US spouse is fully taxable under the Transfer Taxes. Planning opportunities exist to defer or mitigate the estate tax of the US decedent in such case.  

4. US Gift Tax

The general principles set out above regarding US Estate  tax also apply in respect of US federal gift tax, except that does not apply to gifts of intangible property, such as shares in US corporations. A non-US person is subject to federal gift tax on gratuitous transfers, direct or indirect, by a trust or otherwise, of immovable property in the US or other tangible assets located in the US. Non-US persons benefit from the federal annual gift tax exclusion of USD 15’000 (2018) per year per recipient.

5. Rates

The top federal rate for Transfer Taxes is 40%. Depending on the state where the taxable asset is located, additional state Transfer Taxes may apply.

6. Declarations to the IRS

The primary obligation to pay any Transfer Tax due to the US Internal Revenue Service (“IRS”) authorities in the US lies with the executor of the estate of any deceased person. For estates of non-US persons, if no qualified US executor is appointed by the estate of the deceased, then every person in possession of the decedent’s property is required to file an estate tax return and may be liable for any US estate tax due.

The initial deadline to file the necessary tax return and pay US estate taxes upon the passing of a non-US person is 9 months after the date of death. The time frame for the IRS to process an estate tax return is six to nine months. A Transfer Certificate is issued by the IRS to the executor when it is satisfied that the tax imposed upon the deceased estate, if any, has been fully discharged or provided for. It is clear that financial institutions (such as banks and trustees) require a Transfer Certificate from the IRS before they can release the assets to the beneficiaries. Importantly, the beneficiaries who have received assets from a deceased estate where no transfer certificate was obtained may become personally liable for the unpaid Transfer Taxes when they transfer such property to a third party.

Interestingly, the relevant regulations state that banks, trust companies, or other custodians in actual or constructive possession of assets of such a decedent can insure prevention of liability for taxes and penalties only by demanding and receiving Transfer Certificates before the transfer of property of non-US decedents.

7. Treaty Relief

Treaties between the US and the country of residence of the non-US decedent could have an impact on the following:

• Assignment of fiscal domicile (i.e.: Taxing Rights)
• Special situs rules for non-US domiciliaries (e.g.: exemption for US stocks/securities)
• Increase in credit amounts
• Special marital deduction for US purposes
• Foreign tax credits

8. Impact on other Taxes

US Transfer Tax considerations may have an impact on income tax and capital gains tax planning in the US as well as the country where the non-US person beneficiary is tax resident.