How Non-US Citizens Can Owe US Estate Taxes


In a recent article, we wrote about estate taxes, we looked at how these taxes can cause chaos for US persons. But — due to time and space constraints — that article didn't have the chance to address another set of people who estate taxes can have a significant effect on – non-US persons who die with assets in the US.


With the United States being the international melting pot that it is, you would think that taxes for non-US persons would be as straight-forward as possible. Think again. I long ago came to the conclusion that the IRS is doing everything in their power to make everything as complicated and stressful as possible. And, once again, they've succeeded.


Here's where things can get a bit confusing, so I'll try and make it simple. Under US tax law, the estates of foreign holders with US assets are required to pay estate taxes on those assets after the death of the owner. This includes stocks, real estate, or valuables. That's a difficult concept; if a person holds any US-based assets, then their estate is taxed on those assets when they die, even if they're living abroad.


So, you're saying if I’m not a US citizen and don’t live in the US, I may still have to pay US taxes?


Unfortunately, yes. The IRS strikes again. In true IRS fashion, there is potential for stiff penalties if you don’t file or if the IRS thinks you’re trying to dupe them. The following, courtesy of The Executor's Handbook, verifies this:

The law provides for penalties for both late filing of returns and late payment of tax unless there is a reasonable cause for delay. There are also penalties for willful attempts to evade or defeat payment of tax.

Moral of the story? File the proper forms and don't try to outsmart the IRS.


How do you avoid this IRS pitfall?


A little preparation on your part can save your family a lot of headaches. If you are a non-US person and are worried about what type of estate tax you may leave your heirs, some tax planning may help you avoid this costly tax. That being said, these can be rather complicated matters; it's a prudent decision to speak with a competent US tax adviser about what options might be best for your particular situation.


If you are in a state of mourning, the last thing you would want is to get a knock on the door from the United States Internal Revenue Service. Unfortunately, and I hate to be the bearer of bad news, it can happen. The IRS has a worldwide reach (most people aren't aware of it, but the IRS admits to having agents embedded all around the world).


If you are a non-US person, it's important to ask yourself, “Do I have any US assets?” If you do, here’s what you need to know:


  • According to IRS instructions, “The executor must file Form 706-NA if the date of death value of the gross estate located in the United States exceeds the filing limit of $60,000. The total value of the gross estate may be reduced by the sum of: The gift tax specific exemption (section 2521) allowed for gifts made between September 9, 1976, and December 31, 1976, inclusive, and the amount of adjusted taxable gifts made after December 31, 1976;"
  • The form must be completed within nine months of the date of death;
  • The minimum tax rate you’d be responsible for is 18%, and the maximum is 40% (see page six of the instructions for the Unified Rate Schedule); and
  • There are quite a few other documents that need to be attached to this form (a certified copy of the will, death certificate, and various other statements based on assets). To further complicate the process, you need to include “an English translation to all documents in other languages.”


*As a side note – if you are domiciled in America, your estate — even if you’re a non-US citizen — is subject to tax on worldwide assets less worldwide debts. The rules we've discussed are for those not residing in the United States. The exact wording in the regulation is: “A ‘resident’ decedent is a decedent who, at the time of his death, had his domicile in the United States. A person acquires a domicile in a place by living there, for even a brief period of time, with no definite present intention of later leaving.”

We have a podcast and article that expand on this topic!