THE U.S. INHERITANCE TAX APPLIES TO FOREIGNERS WHO OWN PROPERTY AND INVESTMENTS IN THE UNITED STATES, AND CAN BE AS HIGH AS 35%.
U.S. CITIZENS OR PERMANENT RESIDENT ALIENS:
The size of the estate does not matter, without a proper family trust, or other inheritance document, the estate may be subject to a 10% probate expense on the death of the owner.
In cases where a worldwide estate is valued in excess of $5,000,000 the U.S. will impose and inheritance tax – and it does not matter if the estate assets are located outside of the United States.
FOREIGNERS WHO STAY OVER 180 DAYS PER YEAR IN THE UNITED STATES, AND NON-RESIDENT/NON-CITIZEN ALIENS WITH ASSETS IN THE UNITED STATES IN EXCESS OF $60,000:
Property and investments in the United States that are valued in excess of $60,000 are subject to an inheritance tax of up to 35% and 10% probate expenses.
The U.S. Government has an inheritance tax that brings the very real possibility of very expensive consequences to the recipients of an estate that involves a resident or non-resident foreigner.
Worldwide, no other country has a similar tax on foreign investment.
For this reason many foreigners (citizens of other countries, and dual Citizens of the U.S.) do not understand the costs and the risks inherent in investing in U.S. Real Estate and other assets, including stocks, bonds, and interests in corporations. The risk is very real that such an investor may have unforeseen tax liabilities both during his or her lifetime, as well as inheritance taxes imposed on assets located in the United States.
The purpose of this document is to focus in a simple and brief manner the costs, risks, and the very real possibility that exists that the investor may “gift” up to 35% of his estate to the U.S. Government without proper planning and foresight.
With proper planning these tax obligations can be reduced or eliminated entirely.
The inheritance tax owed to the U.S. government becomes due on the death of the owner of the subject property. Once the owner has died there is very little or nothing that can be done to avoid or reduce the tax liability.
As of the time of this writing the Federal Inheritance tax has a maximum taxation rate of 35%. This can be a very significant cost, and without effective planning the family and the heirs of the estate will not be able to obtain the full value of the property left to them, and instead the administrator of the estate will be obligated to pay the very high inheritance tax owed to the U.S.
Independent of the amount owed in Federal inheritance taxes, many states in the U.S. also have their own inheritance tax obligation, so additional planning is necessary to deal with the Federal and potential State inheritance taxes.
WHO IS OBLIGATED TO PAY THE INHERITANCE TAXES?
The Federal Inheritance tax applies to:
All U.S. Citizens.
All non-U.S. Citizens who are permanent residents in the U.S. (or anyone who stays more than 180 days per year in the U.S.).
All non-U.S. Citizens who ARE NOT permanent residents in the U.S., but who have property, investments, or assets in the U.S. at the moment they die.
The effective tax rate depends on many variables including the value of the assets and property and where the property may be located at the moment the owner dies. Careful planning before the owner’s death can preserve the estate that has been earned through many years of hard work, and also permit its preservation and distribution according to the owner’s wishes – and NOT to the U.S. Federal Government in the form of an inheritance tax.
CITIZENS AND OTHER PERSONS WHO HAVE PERMANENT RESIDENCE IN THE U.S.
U.S. Citizens and all permanent residences are subject to an inheritance tax based on their ENTIRE ESTATE, and this includes the part of the estate that is NOT located in the U.S. It is safe to say that the ENTIRE estate is considered when applying the inheritance tax regardless of where the estate assets are located.
The result is that the law is clearly unjust when looking at a foreign citizen, of Mexico for example, who will be subject to an inheritance tax based on his entire estate, even that part located in Mexico, Europe, or the U.S.
In this case, the tax is based on the worldwide estate that exceeds a value of $5,000,000.
NON-CITIZENS WHO DO NOT HAVE PERMANENT RESIDENCE IN THE U.S.
Those persons who are not citizens and not permanent residents in the U.S. are still subject to inheritance taxes related to all real estate, property, investments, and assets (except bank accounts) that are located in the US.
In this case, the inheritance tax is applied where the world wide assets of the deceased exceed $60,000.
As an example, the following are assets that the U.S. Federal Government will consider as taxable assets subject to the inheritance tax:
Almost all personal property that is located in the U.S. For example:
-All types of vehicles;
-Art and objects of art;
-Ships, and boats;
Stock in a Corporation that is based in the U.S., for example
-Stock in a Closed Corporation or S-Corporation;
-Stock in Apple, Microsoft.
Debts or obligations owed by citizens of the U.S., including:
-Certain governmental entities including bonds;
-Individual or Company accounts receivable;
-Pay orders that belong to companies or individuals
Intangible property may be subject to estate tax when they are payable by a resident of the U.S., a domestic corporation based in the U.S., or a governmental entity, for example:
-The Good Will of a Business;
-Judicial Obligations – ordered by a Court,
-Interests in a partnership, other business entity;
-Interests in a Trust – such as the typical Family Trust used in the U.S. to avoid probate;
-Patents and registered trademarks;
-All types of Real Estate located in the U.S., like:
-Homes, Apartments, Condominiums;
Fortunately, the following are NOT LIKELY considered assets subject to inheritance taxes:
Bank deposits are never considered for this tax;
Certain types of government bonds may not be considered subject to tax;
Life insurance proceeds are not usually considered subject to tax.
CALCULATING THE INHERITANCE TAX FOR NON-CITIZENS
There are certain deductions that are applied BEFORE the estate tax is applied.
These deductions may include certain expenses, losses, debts, and other taxes that may be owed.
Notwithstanding these deductions, non-citizens who do not have permanent residency my ONLY USE THESE DEDUCTIONS when they subject their WORLDWIDE estate to an accounting. This implies that for purposes of taking advantage of legitimate tax deductions in the U.S., the family of the deceased will have to provide an accounting of their WORLDWIDE estate, and the deductions can only be applied based on the expenses related to the assets that are located in the US, in relation to the worldwide estate.
There are also additional deductions that may be available related to the transfers for the benefit of the public, charities, or religions. There may also be a spousal deduction, as long as the surviving spouse is a U.S. Citizen.
THE INHERITANCE TAX RATES
After application of the available deductions, a tax related to the value of all assets subject to tax that are located in the U.S. is applied at a rate of 35%.
Once the 35% tax is applied, it is reduced by $13,000.00, which corresponds to the first $60,000 that is exempt from the tax. This needs to be compared to the standard deduction afforded U.S. Citizens and residences which provides an exemption for the first $5,000,000.
HOW IS THE TAX IMPOSED AND CHARGED?
According to Federal Law, the representative of the estate, or if there is no representative then heirs who receive the estate proceeds, are PERSONALLYresponsible for the payment of a timely and complete payment of the estate taxes owed. This represents a legal obligation to prepare and file the proper declaration indicating and paying the full amount of the taxes that apply. This declaration must be filed during the 9 months following the death of the owner of the estate.
If the taxes are not paid, the U.S. Government can seize the property of the estate and the personal property of the heirs WITHOUT the need for a Court Order as may be necessary to collect the inheritance tax owed.
THERE ARE OPPORTUNITIES TO PLAN FOR, AND AVOID THESE TAXES THROUGH APPROPRIATE AND TIMELY ESTATE PLANNING
What is described above is a brief description of a very complex area of the law, and this provides some guidance in the very real possibility of losing 35% of the value of an estate through improper or non-existent planting.
Fortunately, there are many steps and opportunities that with, proper planning can be used to minimize or eliminate the inheritance taxes that may be owed by a non-citizen.
The steps that may need to be taken depend on the exact situation an individual estate may have, and there is no solution that will fit every situation. Depending on a particular situation, there are many steps that can be taken, and some of the most common steps are:
Avoiding residency or citizenship in the U.S.
Restructuring the title of property whereby it is not considered part of the estate that is domiciled in the U.S.
Making appropriate qualified gifts before the death of the owner of the estate.
Transfer of certain property to legal entities using the prudent application of certain trusts available under the Civil Law of the U.S.
Operating companies or assets that are located in the U.S. either directly or indirectly by way of a corporation or other entity that is not located in the U.S.
Appropriate use of loan instruments to reduce the value of an estate.
Using life insurance products and strategies that are specifically designed for the particular estate.
Notwithstanding all of the above, all estate planning must take into consideration the multiple variables that exist in each individual case, and these strategies must be coordinated into a global strategy to provide the greatest protection for the individual estate.
Please contact me for a FREE CONSULTATION to determine what might be right for you and your estate.
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