Deceased nonresidents who were not American citizens are subject to U.S. estate taxation with respect to their U.S.-situated assets.
U.S.-situated assets include American real estate, tangible personal property, and securities of U.S. companies. A nonresident’s stock holdings in American companies are subject to estate taxation even though the nonresident held the certificates abroad or registered the certificates in the name of a nominee.
Exceptions: Assets that are exempt from U.S. estate tax include securities that generate portfolio interest, bank accounts not used in connection with a trade or business in the U.S., and insurance proceeds.
Having worked for the Internal Revenue Service for 32 years as a senior attorney in international estate tax, and having subsequently prepared several hundred nonresident alien estate tax returns (form 706NA) for aliens who died owning property in the US with a value in excess of $60,000, I am aware that many attorneys/accountants who prepare tax returns in this somewhat limited area (perhaps 1,200 to 1,500 filings per year) are not familiar with a number of tax savings devices which are not intuitively obvious.
The most obvious device for reducing tax, is a tax treaty or convention between the United States and the country from which the decedent originated or was domiciled. Estate tax treaties between the U.S. and other countries often provide more favorable tax treatment to nonresidents by limiting the type of asset considered situated in the U.S. and subject to U.S. estate taxation. Executors for nonresident estates should consult such treaties where applicable.
However, this will not cover most countries since there are approximately 193 countries in the world and the treaties encompass about 20 of these countries. The bulk of the countries covered by treaty are in Europe, England, and Canada. The treaties themselves are very poorly written and difficult to understand so I would recommend that when you do use such a treaty, you also look at the interpretation of the treaty created by the Treasury Department so that mere humans can understand the incomprehensible.
Beyond treaties, there were a number of devices which exist, the purpose of which is to reduce the federal estate tax. The most prevalent of these is offered in section 2106, IRC, where one is invited to, by verifying the value of the gross estate outside the United States, take apportioned deductions for debts and expenses incurred worldwide by the decedent or his estate. Very critical to remember is the fact that the IRS must believe your depiction of the non-US assets and their fair market value. Many people come to me and said that they want to use a zero figure for the gross estate outside the United States and that the IRS will have to live with it. Wrong! If the IRS has even a scintilla of suspicion about the purported foreign assets or their value, the IRS will simply disallow all the debts and expenses.
At that point, if you wish to continue to pursue the deductibility of the debts and expenses, you are required to prove both the expenses themselves and the fair market value of the assets which means, words that you don't like to hear, an IRS audit! It is much easier to try to verify the value of the foreign assets as part of your due diligence and avoid a confrontation with an estate tax attorney.
Community property is an area with rich rewards for the tax preparer; it is also very poorly understood. If the decedent lived in a country in which the presumption of marriage is community property of assets, all assets (except gifts and inheritances) obtained by the wedded couple become community property. When one of them dies, irrespective of title, one half of the assets are excluded from the estate since they are legally the property of the other person. Generally the IRS is somewhat skeptical about this claim so if I have an estate from which I wish to exclude a portion based on community property, I generally get an opinion of law from counsel in the country where the marriage occurred.
The marital deduction-since the 1990s, the IRS is not allowed a marital deduction for property passing to a nonresident alien spouse. The criteria for this was that in virtually every instance, the nonresident alien would receive the assets, tax free, and leave the US, paying no tax on assets which had been sitused in the United States. Ergo, no more marital deduction. To try to soften this blow, Congress, in section 2056A, created the qualified domestic trust. The qualified domestic trust basically allows assets passing through a special trust to a nonresident alien spouse to qualify for a marital deferral. Each time the spouse removes assets from the trust, he/she, is required to file a form 706QDT.
Executors for nonresidents must file an estate tax return, Form 706NA, United States Estate (and Generation-Skipping) Tax Return, Estate of a nonresident not a citizen of the United States, if the fair market value at death of the decedent's U.S.-situated assets exceeds $60,000.
However, if the decedent made substantial lifetime gifts of U.S. property, and used the applicable $13,000 “unified credit exemption” amount to eliminate or reduce any gift tax on the lifetime gifts, a U.S. estate tax return may still be required even if the value of the decedent’s U.S. situated assets is less than $60,000 at the date of death (due to the decrease in the “unified credit exemption” for the lifetime gifts). See Unified Credit (Applicable Credit Amount) Section in Publication 559, Survivors, Executors, and Administrators, and the Form 706NA Instructions for more information.
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Robert S. Blumenfeld - Estate Tax Counsel
Mr. Blumenfeld concentrates his practice in the areas of International Tax and Estate Planning, Probate Law, and Representation of Resident and Non-Resident Aliens before the IRS.
Prior to joining Marini & Associates, P.A., he spent 32 years as the Senior Attorney with the Internal Revenue Service (IRS), Office of Deputy Commissioner, International.
While with the IRS, he examined approximately 2,000 Estate Tax Returns and litigated various international and tax issues associated with these returns.As a result of his experience, he has extensive knowledge of the issues associated with and the preparation of U.S. Estate Tax Returns for Resident and Non-Resident Aliens, Gift Tax Returns, Form 706QDT and Qualified Domestic Trusts.
In return the ATO will receive data from the IRS about Australians with financial accounts in the US and will use that data to detect cases of undeclared offshore income and tax evasion.
