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Forbes
2 days ago
- Business
- Forbes
5 U.S. Estate Tax Surprises For Nonresident Alien Investors
Foreign investors can win big with United States investments. While holding U.S. assets can be lucrative, the U.S. estate tax regime is complex and often misunderstood by nonresident alien investors. NRAs, those who are neither U.S. citizens nor residents for estate tax purposes, are often very surprised when they learn of the challenges imposed by the estate tax rules. This article summarizes 5 estate tax surprises that often catch the NRA investor off-guard. These include the limited exemption amount, common misconceptions about asset types, the requirement to disclose the value of worldwide assets on the NRA's estate tax return, and other pitfalls that can complicate estate planning. One of the biggest surprises for NRA estates is the paltry $60,000 exemption amount for U.S. situs assets subject to estate tax. U.S. citizens and residents are taxed on the value of their assets owned worldwide, but they benefit from a very generous $13.61 million federal estate tax exemption (as of 2025), and under the Trump Administration, this may rise to an inflation-indexed $15 million in 2026. NRAs are limited to a mere $60,000 exemption for U.S. situs assets. This means that if the total value of an NRA's U.S. situs assets exceeds $60,000 at the time of death, the excess is subject to U.S. estate tax at rates ranging from 18% to 40% based on a progressive table, with amounts exceeding $1 million taxed at the 40% rate. Wealthy foreign investors typically hold significant U.S. assets such as real estate, stocks, or business interests. For them, the low exemption amount can result in substantial estate tax liability that could have been mitigated with proper advance planning and structuring. The harsh effect of the estate tax can be seen for example, by an NRA with $1.5 million in non-exempt U.S. situs assets. Assuming no treaty applied to reduce the tax and no deductions are taken, the estimated U.S. estate tax would be a punishing $532,800 (a tax hit that is over 35% of the U.S. investments, significantly eroding their value). A very common source of confusion arises when identifying which assets are subject to, or exempt from, U.S. estate tax. Many NRAs mistakenly believe that cash-related holdings are exempt from the estate tax. They do not appreciate the subtle but highly important nuances. For example, bank deposits in a U.S. bank are generally not considered U.S. situs assets due to special rules. They are thus exempt from U.S. estate tax, provided they are not connected to a U.S. trade or business. Typically, this exemption applies to cash held in checking or savings accounts, certificates of deposit, or similar instruments. Many NRAs mistakenly assume this exception applies to cash held in a U.S. brokerage account but are shocked to learn that this cash is treated differently. It is considered a U.S. situs asset subject to the estate tax. Estates of foreign uninformed investors will be faced with a surprise estate tax bill since the tax law's distinction transforms what seems like a 'safe' cash holding into a taxable asset. The U.S. estate tax treatment of U.S. stocks, U.S. mutual funds, U.S. ETFs, and similarly structured U.S. vehicles is clear. These are U.S. situs assets subject to estate tax, regardless of where they are held. It will not be a shield from U.S. estate tax simply because the assets are held in a foreign brokerage account, or in the name of a nominee. Furthermore, the custodian will usually not release the assets to heirs without receiving what is called a Federal Transfer Certificate or other proof that U.S. estate tax has been fully paid. It can sometimes take well over a year for the NRA's U.S. estate tax return on Form 706-NA to be filed, tax paid and the matter to be fully resolved with the IRS. This rule can and does, trap NRAs who hold substantial U.S. investment portfolios of through international accounts. Too many foreign investors are unaware of this exposure until it's too late. This is why advance planning should be undertaken. For example, use of a properly formed estate tax 'blocker' is often a simple and beneficial solution. Perhaps one of the most jarring surprises for NRA estates is the requirement to disclose the value of the decedent's worldwide assets when filing the U.S. estate tax return. Only the assets treated as located within the U.S. are subject to the estate tax, but the IRS requires a complete picture of the decedent's global estate to determine the computation of the tax. This requirement is often viewed as very intrusive and if more investors were aware of it, they might reconsider U.S. investments or at least, implement ownership structures to avoid the estate tax. The disclosure of worldwide asset value is required for the IRS to determine whether certain deductions and treaty-based benefits may apply and specifically to calculate the amount of allowable deductions under a special proportional deduction rule. If the estate wants to benefit from these, the disclosure must be made. Although the worldwide disclosure is technically required only if the estate claims deductions or treaty benefits, omitting the information can possibly cause the return to be treated as incomplete. This can jeopardize the estate's ability to claim any of these benefits at a later time, for example, on audit. As such, full disclosure of the value of the decedent's worldwide asset value is generally the safest course. Sophisticated investors often use blocker structures, for example, holding U.S. assets through a foreign corporation. This permits the investor to avoid U.S. estate tax entirely. At death, the decedent owns shares in a non-U.S. corporation. Since shares of a foreign corporation are generally not U.S.-situs property, they are not subject to U.S. estate tax. By holding the U.S. assets indirectly through such entities, NRA investors can avoid both the estate tax on death and the intrusive requirement to disclose worldwide assets. Such strategies are commonly used by high-net-worth individuals who want to tap the U.S. market but wish to avoid triggering the U.S. estate tax regime. Think you're good because of a treaty? Think again! Another unwelcome surprise for the foreign estate lies in the limited scope of estate tax treaties. It is true that the U.S. has estate tax treaties with certain countries to mitigate double taxation, but too often they provide less relief than expected, and as discussed, claiming treaty relief means significant disclosure about the value of worldwide wealth. Some treaties allow for a prorated exemption based on the ratio of U.S. situs assets to worldwide assets. For high-net-worth taxpayers, this may not significantly reduce the U.S. estate tax burden. Complications also when the decedent's home country also imposes estate or inheritance taxes on the assets. Quite often there is a mismatch and the lack of coordination between the two tax systems can lead to double taxation, unless specific treaty provisions apply. The foreign estate may be surprised to find that the home country's tax authorities and the IRS both claim a share of the estate. Careful planning is needed when foreign laws and U.S. laws overlap and sometimes collide. Many possibilities exist, including ownership structures and certain investments, but taxpayers must be proactive in learning and implementing the plan beforehand. For example, one lesser known but welcome surprise is the treatment of life insurance proceeds paid out on an NRA's life. Even if paid by a U.S. insurer, these proceeds are typically exempt from U.S. estate tax. The use of such insurance can provide a robust planning tool for NRAs with significant U.S. assets since the life insurance can provide liquidity to cover the U.S. estate tax without itself being taxable. Get the proper advice so that efficient planning strategies are not overlooked! Stay on top of tax matters around the globe. Reach me at vljeker@ Visit my U.S. tax blog
Forbes
4 days ago
- Business
- Forbes
U.S. Estate Tax Follows Expatriates Under Section 2801
T Tina Turner (Photo by Blick/RDB/ullstein bild via Getty Images) ina Turner's death in May 2023 sparked an interesting consideration for the estates of expatriates. She relinquished her citizenship in late 2013, approximately ten years before her death and resided in Switzerland at her death. Despite being a noncitizen of the U.S. at her death, Turner may have been subject to U.S. income and estate taxes depending upon whether she was considered a covered expatriate and whether she had assets that would be considered U.S. assets taxable in her estate. The impact of the estate tax could deplete 40% of the assets subject to tax at her death. Given her substantial wealth, it is likely that she engaged in significant planning that minimized or eliminated any tax exposure regardless. However, if she had made transfers either during her lifetime or at death to any U.S. beneficiaries, significant tax compliance and payment obligations could have resulted for both the beneficiaries and her estate. The following is a brief overview and some of the common considerations for expatriates in similar situations where they may not consider having the U.S. tax system apply even where they have no direct investments in the U.S. IRC Section 2801 imposes a tax on U.S. citizens or residents on the receipt of "covered gifts" or "covered bequests" from individuals who fall within the definition of a covered expatriates. The tax is imposed on all transfers, whether during the expatriate's lifetime or at death, as an estate tax. The law provides that the individual would be a covered expatriate if any of the following apply: (1) Had an average annual net income tax liability exceeding a specified threshold aligned with an inflation adjusted amount for five years preceding the date of expatriation, (2) Had a combined net worth of $2 million or more on all assets globally on the date of expatriation, or (3) Was noncompliant with U.S. tax obligations for five years preceding expatriation. Tax obligations extend beyond income tax to certain excise taxes as well that may be considered with personal income tax obligations. Section 2801 imposes the highest estate tax rate in effect at the time of the gift or bequest. This rate is currently 40%. In January 2025, the U.S. Congress issued final regulations on the taxation of gifts and bequests from covered expatriates. These regulations introduced the filing of a new Form 708 to report these transfers. Form 708 must be filed by U.S. recipients of covered gifts or bequests by the 15th day of the 18th month following the end of the year in which they received the covered gifts or bequests. Noncompliance subjects the recipients to significant penalties. The trust classification controls whether transfers made to trusts by covered expatriates fall within the purview of the reporting requirements and tax: In addition to other factors, compliance and tax exposure for transfers from covered expatriates should be considered in structuring trusts and making elections. Regulations under Section 2801 were passed nearly seventeen years after the statute and the scope of some provisions, especially their retroactive applicability remains uncertain. To prevent cumbersome audit issues and potential noncompliance complications, it is prudent to consider: Continued increase in expatriation makes consideration of the broader tax implications and application of covered expatriate rules significant. Celebrities and public figures face additional challenges in terms of asset location and valuation because of rights of publicity (name, likeness, and image rights) which may be deemed to be located in the U.S. even though all their assets are abroad. These issues also arise with other intangibles such as cryptocurrency, artificial intelligence, and technology. Careful asset protection and planning well before any expatriation can be critical to avoid unexpected surprises.
Yahoo
6 days ago
- Business
- Yahoo
Inheritance tax: How it works and how it differs from estate tax
An inheritance tax is levied when a beneficiary inherits assets from the estate of someone who died. There is no federal inheritance tax, but five states currently levy this tax: Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. (Iowa was a sixth state on that list until it ended its inheritance tax starting in 2025.) The federal government does levy an estate tax, as do 12 states and Washington, D.C. Maryland is currently the only state to assess both an estate and an inheritance tax. Unlike an estate tax, which is paid by the estate before the assets are distributed, an inheritance tax is paid by the beneficiary on the assets' value. The tax is levied if the person who died lived in a state that has an inheritance tax, even if the beneficiary lives in a state without an inheritance tax. The inheritance tax rate, as well as which assets it applies to and which beneficiaries must pay it, varies by state. Each state has its own rules (more on that below). In states with an inheritance tax, beneficiaries pay a tax on the value of their inheritance. Often, the inheritance tax is a progressive tax, which means the tax rate increases with the value of the bequest. (A progressive tax system employs a series of tax rates, whereas a flat tax system generally uses one tax rate for all income levels.) Some states assess different tax rates depending on the asset received, or the beneficiary's relationship to the person who died. Close relatives may be exempt from the inheritance tax, or may pay a lower rate. State laws vary and are subject to change. In 2024, the highest inheritance tax rate among the five states (remember, states usually levy a range of inheritance tax rates) ranged from 10 to 16 percent, with New Jersey and Kentucky having the highest top tax rate of 16 percent, according to a report by the Tax Foundation. Some states, including Nebraska, New Jersey and Maryland offer an inheritance tax exemption, which allows the beneficiary to avoid the inheritance tax if the asset's value is less than the exemption amount. For example, in Nebraska, immediate relatives are given a $100,000 exemption — that is, close relatives pay a 1 percent tax on the value of inherited assets exceeding $100,000. In New Jersey, spouses, domestic partners, children and grandchildren are exempt from paying inheritance taxes. Some beneficiaries, including siblings of the person who died, pay inheritance tax rates of 11 to 16 percent after a $25,000 exemption. Other beneficiaries, including aunts, uncles and cousins, pay rates of 11 to 16 percent on the entire inheritance, without the benefit of an exemption amount. Maryland offers an inheritance tax exemption for property worth less than $1,000; the state also exempts surviving spouses, children, grandchildren, great-grandchildren, parents and grandparents from paying an inheritance tax. Need an advisor? Need expert guidance when it comes to managing your money? Bankrate's AdvisorMatch can connect you to a CFP® professional to help you achieve your financial goals. In 2025, five states impose an inheritance tax: Kentucky Maryland Nebraska New Jersey Pennsylvania The highest inheritance tax rates range from 10 percent in Maryland to a high of 16 percent in Kentucky and New Jersey. Until 2025, Iowa had the lowest rate: 2 percent. However, Iowa abolished its inheritance tax, starting in 2025; beneficiaries won't pay inheritance taxes in Iowa beginning Jan. 1, 2025. It's easy to confuse the inheritance tax with the estate tax, but the two are quite different. The inheritance tax is imposed on the individual who inherits assets from someone else. An estate tax is imposed directly on the decedent's estate before the assets are distributed to beneficiaries. The federal government imposes an estate tax of 18 to 40 percent on assets above a specific exemption amount. That amount is $13.6 million in 2024, and almost $14 million in 2025. In addition to the federal government, 12 states and the District of Columbia charge a state estate tax. For this reason, some estates pay both a federal and state estate tax. Like the federal government, states that have an estate tax generally offer an exemption amount. In 2024, state estate tax exemption amounts ranged from $1 million in Oregon to $13.6 million in Connecticut, according to the Tax Foundation. In addition to the District of Columbia, these 12 states impose an estate tax: Connecticut Hawaii Illinois Maine Maryland Massachusetts Minnesota New York Oregon Rhode Island Vermont Washington While beneficiaries have limited options for reducing taxes after receiving an inheritance, they should check state rules to see if they qualify for any exemptions that would help them reduce or avoid the tax altogether. However, those who plan to leave an inheritance to loved ones should consider the following strategies to reduce or avoid inheritance tax for their beneficiaries. Take advantage of the annual gift tax exclusion, which allows you to transfer wealth while you're still alive, without paying taxes. For 2025, the annual gift tax exclusion is $19,000 per recipient (up from $18,000 in 2024). In 2025, individuals can gift $19,000 to as many people as they choose without triggering the need to file a gift tax return. If you're married, each spouse can gift $19,000. For example, in 2025, a couple with four children can gift a total of $152,000 to their children ($19,000 per spouse to each child) without triggering the gift-tax-return requirement. If you exceed that annual limit for any one beneficiary, it's likely you'll need to file a gift tax return, Form 709, with your Form 1040. (And married couples, especially, should consider consulting with a tax professional when employing a 'gift splitting' strategy.) But keep in mind that you still won't owe gift taxes unless you exceed your individual lifetime estate and gift tax exemption, which currently is almost $14 million. Another way to avoid the inheritance tax is to choose to reside (or own property) in a state that doesn't impose the tax. Currently, five states impose an inheritance tax. Choosing to forego these states means you're helping your beneficiaries avoid the inheritance tax altogether. (Inheritance tax is levied based upon where the decedent lived.) Meeting with an estate professional to create a plan to eliminate or reduce inheritance or estate taxes is wise. Making a plan can remove a heavy burden at the time of death.
Forbes
19-05-2025
- Business
- Forbes
Portability: Should You File An Estate Tax Return?
Introduction When the first of two spouses dies the survivor can safeguard the estate tax exemption that the deceased spouse's estate did not use. The unused exemption is called the Deceased Spouse Unused Exemption or 'DSUE.' The concept of passing on that exemption is called 'portability.' The whole point of this is to 'simplify' the estate tax system. 'Simplify' is in quotes since anyone who has grappled with any aspect of our tax system knows that it is rare at best that anything in the tax Code is ever simple. To understand how portability simplified the system you need to understand what happened before portability existed. Before portability if say the husband died and wanted to protect his estate tax exemption he would bequeath assets to a trust for his wife (and often for his wife and all descendants). That would use or safeguard his exemption, permit the surviving spouse to benefit (which is often the personal goal), and avoid the assets being included in the surviving spouse's estate. One problem with that was that it required hiring an attorney with the sophistication to draft a will (or revocable trust) that included this type of trust, dividing assets between spouses, then on death that trust had to be funded (a step that was often overlooked), and then the trust had to be administered and an annual income tax return for the trust filed. That was complicated, costly and a step that was often missed. So, Congress enacted portability so that could all be avoided. Yet portability, despite all the good intent, requires filing an estate tax return and involves a decision process and awareness that few lay people are aware of, and which many either don't understand or fail to appreciate the benefits of. You secure your late spouse's exemption you must make an election on a timely-filed estate tax return. That means the cost of filing an estate tax return. Further, if you do file for the DSUE the time period during which the IRS can audit (called the 'statute of limitations') remains open for the decedent spouse's estate tax return until the statute of limitations has run on your (i.e., the surviving spouse's) estate tax return. That could be a long time. Consider how complex and costly it can be to file an estate tax return the law permits your personal representative to not report the value of certain property that qualifies for the marital or charitable deduction (since those would not be subject to estate tax in any event). Also, to use this special rule the executor must exercise due diligence to estimate the fair market value of the assets included in the deceased spouse's gross estate and report the values under penalty of perjury to the IRS. In reality, many CPAs have found these rules sufficiently nettlesome, that they just try to get actual values. Also, you need values to support the basis adjustment of the deceased spouse's income tax basis on the property to the fair market value at death. Since that can have important income tax implications, and because the potential impact of different valuations on beneficiaries, many CPAs or other tax preparers (e.g., the attorney handling the estate) opt to get real numbers. So, the law was really complicated before portability. Congress tried to simplify the rules especially to help smaller estates, but created a host of new complications and traps. What's the bottom line? There is incredible uncertainty over estate taxes. For example, will the next election bring a different administration that might reduce the exemption to $1 million? Who knows. Here are a few thoughts: So, likely many more surviving spouses should file an estate tax return to secure their deceased spouse's unused exemption. Many don't simply to save money. Cost is clearly a significant consideration but it is not the only one. Why Bother Filing? A common belief that many taxpayers exhibit is 'Why file and incur the cost since the total estate is so much less than one exemption?' The answer to that question can be analyzed with a few more questions like: Mom Can Just Gift Assets to Us There is no shortage of ideas how to avoid the expense of filing an estate tax return to secure the exemption of your spouse that passed. Another one of these 'ideas' goes like this. 'Dad died. So, mom can just gift assets to us so she wont have a taxable estate.' First, read the 'what-if' questions above. These same uncertainties may apply to your family as well. It is not clear what the idea behind the surviving spouse making gifts is, but here are a few thoughts: A Better Option Have a CPA file an estate tax return for the first spouse to die. If the assets come outright to the surviving spouse he or she can gift assets into a trust that can protect the assets, protect heirs, and assure the surviving spouse access. With the potential cost of several of the uncertain future developments it just doesn't make a lot of sense to save a few bucks now for risk and problems later. You might turn out to be right and perhaps the filing could prove unnecessary. But if you are proven wrong it could be too late and dramatically more costly then the saving in professional fees.
Bloomberg
12-05-2025
- Business
- Bloomberg
GOP Starts Crucial Week With Key Tax, Spending Issues Unanswered
House Republicans are struggling to resolve key issues with President Donald Trump's multi-trillion dollar tax package after weekend talks, including a change in the deduction cap for state and local taxes and a potential hike in the rate for high earners. Key GOP-led committees dribbled out parts of their plan over the weekend, such as an increase in the maximum child tax credit to $2,500 and raising the estate tax exemption to $15 million. Those were items in an incomplete menu of proposals required to be released before Monday.
