INTERNATIONAL ESTATE PLANNING

Special estate planning opportunities are present when a non-U.S. person holds assets, or otherwise conducts activities, in the United States. If such non-U.S. person does not qualify as a resident of the United States and is not a U.S. citizen, then such person could be subject to unexpected U.S. estate tax or gift tax liability.

For example, a resident of Dubai who neither resides in the U.S. nor holds U.S. citizenship may invest in stock of U.S. companies. Such stock would constitute “U.S. situs” property”—or property that is located the United States—for U.S. estate tax purposes. 

Regardless of the fact that the stockholder resides in Dubai and has no connections to the United States other than such holdings, any such property situated in the United States will be subject to estate tax upon his or her death to the extent it the value of the U.S.-situs property exceeds $60,000 (effectively providing a credit against applicable tax up to a maximum of $13,000). Note that the tax credit is not indexed to inflation.

Similarly, a resident of China who holds real estate in the United States—for example in Miami, Florida—will be subject to the same U.S. estate tax regime upon his or her death with respect to such real estate, subject to the credit mentioned above. 

This is a surprising result for any international investor or businessperson that has assets and activities in the United States. Such person has minimal connection to the United States and already has a separate estate plan in their home jurisdiction (or as would be the case in most civil law jurisdictions, is subject to completely different regime which will determine the distribution of the decedent’s property). In addition, such person may already be subject to estate tax or inheritance tax laws in their home jurisdiction. They may be unpleasantly surprised to discover that not only are they subject to tax in the United States as well, but also that the taxes paid in their home jurisdiction are not creditable in the United States. 

In addition to these considerations, any non-U.S. person conducting activities in the United States needs to be mindful of potential U.S. income tax liability. In the above example, a resident of China who holds real estate in the United States will be subject to U.S. net income tax on the gain realized upon disposition, pursuant to the Foreign Investment in Real Property Act (or FIRPTA), which is found in Section 897 of the Internal Revenue Code. Such person will also be subject to a direct income tax filing requirement—a particularly bothersome result if there is a desire to minimize contact with U.S. tax authorities. 

There are workable solutions to all these issues. At Premier Capital Law PLLC, we work closely with our international clients to identify any potential U.S. estate tax exposure. The first step will often be contact and coordination with the client’s local counsel in their home jurisdiction. We will need to obtain a comprehensive understanding of local law and how it may interact with relevant U.S. law. Next, we would need to determine whether any U.S. estate and/or gift tax treaties may be in effect which could reduce or eliminate U.S. tax exposure. 

Finally, a variety of structuring options are available to “shield” a non-U.S. person’s property from U.S. estate tax liability. For example, the title to certain U.S. property could be contributed or transferred to a non-U.S. corporation. In other cases, it may be better to hold such property through a foreign trust (ideally located in certain tax favorable jurisdictions, such as the British Virgin Islands or Bermuda). Trusts are a particularly complicated structuring device that are unique to the U.S. and other common law jurisdictions, and we work carefully with our clients to explain to them exactly what trusts are and how they would be utilized. Both options need to be reviewed by the client’s local counsel to fully understand any implications in the client’s home jurisdiction.