If you have accounts, trusts, or received gifts in a foreign country, you have a duty to report those assets to the IRS. If you do not report these assets, it can result in significant fines and penalties.
With the right estate and gift tax planning, you can avoid these penalties. The IRS lays out specific exemptions depending on your immigration status. For U.S. citizens and residents, exemptions can be claimed that can save thousands of dollars. Non-U.S. citizens also have a duty to report estate assets and gifts but exemptions are available to them, as well. What you owe will usually depend on your immigration status at the time of filing.
For a free case evaluation with our experienced attorneys for international estate and gift tax planning, call McCormick Tax Law at (215) 630-0861 today.
U.S. Estate and Gift Tax Planning Law
Estate and gift taxes in the United States are primarily imposed based on an individual’s citizenship to a specific country. The federal estate and gift taxes for U.S. citizens typically have a maximum rate of 40%. Nonetheless, with a $25.84 million estate tax exemption for each married couple, numerous U.S. citizens fall below the exemption threshold and do not usually need to consider estate tax planning.
Individuals who are not U.S. residents, commonly referred to as nonresident aliens, might also be subject to U.S. estate tax on U.S. property, which generally includes U.S. real estate and shares in U.S. companies. Fortunately, our attorneys for international estate and gift tax planning can help you regardless of your residency status. If a nonresident person lives in a country that has an estate tax treaty with the U.S., they might receive favorable estate and gift tax treatment. However, in the absence of a tax treaty, nonresident aliens could face substantial U.S. taxation on their U.S. assets since they only have a $60,000 estate tax exemption.
Estate Tax Exemption for U.S. Citizens and Residents
At present, U.S. citizens and residents receive an exemption from the 40% U.S. estate tax on assets valued up to $11,580,000, which is granted individually. Married couples can also benefit from an estate tax exemption twice this amount, which is $11,580,000 per person. However, this estate tax exemption is scheduled to decrease starting in 2026. On January 1, 2026, the exemptions are expected to return to $5.6 million, adjusted for inflation from 2018.
Estate Tax Exemption for Non-U.S. Citizens
The estate tax exemption for non-U.S. citizens is considerably lower than the current $11,580,000 exemption granted to each US citizen and resident. This amount decreases to $60,000 for non-US citizens and residents holding U.S. assets.
It is important to understand that if a non-U.S. alien visits the U.S. for even a brief time, without a clear intention to depart the country later, they are regarded as domiciled in the US and consequently treated as a U.S. resident for estate tax purposes. Under these circumstances, the non-U.S. citizen would receive the same $11,580,000 estate tax exemption extended to U.S. citizens and residents.
How Treaties with Other Countries Can Impact Estate and Gift Taxes
The United States has entered into estate and gift tax treaties with 16 foreign countries, making it vital to recognize the role these treaties can have in your case. Each treaty can modify the rules pertaining to the application of estate and gift taxes between nations in some way.
The content and protections provided by these international estate and gift tax treaties can differ significantly. For instance, the US-UK estate tax treaty and the US-Germany estate tax treaty grant extensive safeguards, while the scope of the Swiss-US estate tax treaty is relatively limited. Estate tax treaties offer a structure for establishing a decedent’s domicile, the situs of the property, and the implementation of tax credits to eliminate double taxation. However, estate tax treaties are most frequently employed by non-US citizens investing in the United States.
Estate tax treaties can help reduce US estate tax on US situs assets for non-US citizens, as well. As an example, a non-US individual living in the United Kingdom with $100,000 worth of Microsoft shares at their death would not incur additional US taxes. However, if this person were to move to Dubai, where no estate tax treaty is in place, the value of their Microsoft shares, which belong to a US-based company, would be taxed at 40% on any amount above $60,000. The impact can be substantial, but with proper planning, such as utilizing a fund, trust, or offshore corporation, much of this taxation burden can be lessened.
Understanding Domicile and Situs Rules for Estate and Gift Tax Planning
Each nation has its distinct method of deciding who and what may be liable for estate and gift taxes. Therefore, a thorough understanding of local estate and gift tax laws is crucial, as the requirements often differ significantly. Further, the physical location of the property or assets in question will also factor into how these taxes are decided.
Residency and Domicile Rules
For immigrants in the United States, the US estate tax is levied based on their domicile. A person is considered domiciled in the U.S. for estate and gift tax purposes if they reside in the country with no current plans to depart. Typically, obtaining a green card for permanent residency highly suggests an intention to remain in the U.S. and establish domicile. For instance, an executive on a one-year assignment in New York may not be deemed domiciled. However, a family residing in the United States with a green card for three years will likely be viewed as fully domiciled and subject to US estate and gift tax. There are no predetermined rules for determining domicile, and courts assess various factors when making such decisions.
Other nations have established regulations to ascertain when someone is considered resident and domiciled. This is particularly common in Europe, where staying a specified number of days in the country results in global assets being subject to local laws. It is even possible that multiple countries could regard the same individual as domiciled there, causing some assets to be subject to estate or gift tax in more than one nation. In these situations, specific tiebreaker provisions in particular tax treaties might need to be employed to establish legal domicile and prevent double taxation.
Situs Rules
Situs rules also affect how certain types of property will transfer. Situs refers to the location of the property for legal purposes. A vacation home in Germany owned by a U.S. citizen living in New York will be considered German situs property and be fully subject to German estate and gift laws. If that individual dies, New York state law will most likely direct how most of their U.S.-based assets pass. However, this does not apply to the German house, and Germany can tax tee transactions and restrict who the house can pass to.
Our Attorneys for International Estate and Gift Tax Planning Can Help
For help with your estate and gift tax plan, contact McCormick Tax Law at (215) 630-0861 for a free case review with our attorneys for international estate and gift tax planning.
