Foreign Residents Must Consider US Estate Tax When They Invest

According to the US Bureau of Economic Analysis, foreign investment in the US increased $212.2 billion to $6.58 trillion by the end of 2022, and likely increased further in 2023. These numbers clearly demonstrate that the US is a popular investment destination for foreign investors.

While it may be a sound investment, the tax consequences of investing in the US can be devastating absent proper tax planning. One aspect of US taxation that frequently catches foreign investors off-guard is the US estate tax.

US estate tax applies differently to US citizens and domiciled non-citizens than it does to non-domiciled non-citizens. The domiciliary status of a non-citizen is the key factor in determining how the estate tax will apply.

Residence and domicile aren’t synonymous. Residence is where one currently lives; it can be permanent or temporary. Domicile, on the other hand, is a person’s permanent home—the place they plan to always return to. A person’s residency and domicile needn’t be the same.

Let’s say a Spanish citizen and resident who considers Spain home, and plans to always return there, takes a three-year work assignment in the US. In this case, they would be US resident while living in the US but would remain domiciled in Spain.

For US tax purposes, residence determines how one is treated for income tax purposes and domicile determines how one is treated for gift and estate tax purposes. The US levies estate tax on the fair market value of assets. Federal estate rates range from 18% to 40%; some states also levy an estate, which can reach as high as 20%, depending on the state.

US citizens and domiciled non-citizens are liable for US estate tax on their worldwide assets. They do, however, receive a generous estate tax exclusion of $13.61 million (2024 amount).

If the assets comprising their estate doesn’t exceed this amount, they won’t owe any estate tax—assuming they haven’t used any of their lifetime gift tax exclusion. Any gift tax exclusion used during one’s lifetime reduces their estate tax exclusion by an equal amount.

The estate tax exclusion increases annually as it is indexed for inflation. It should be noted, however, that the estate tax exclusion is slated to decrease to approximately $7 million when the Tax Cuts and Jobs Act sunsets at the end of 2025.

Non-domiciled non-citizens, on the other hand, are only liable for estate tax on their US situs assets, which generally includes US situated real estate, tangible personal property located in the US, and US stocks (public or private) and partnership interests. In contrast to the generous estate tax exclusion US citizens and domiciled non-citizens receive, non-domiciled non-citizens receive a mere $60,000, which isn’t indexed for inflation.

US real estate and other assets located in the US, are subject to estate tax—but so is stock in US corporations. This has particularly wide-reaching implications because most portfolios, wherever located, contain US stocks. For example, a non-domiciled non-US citizen who owns Apple Inc. stock through a Swiss, rather than a US, brokerage account would still be liable for US estate tax if they died.

To illustrate, if a non-domiciled non-citizen died owning $1.5 million of US situs assets, they would owe $576,000 of estate tax. This is calculated by subtracting the exclusion amount of $60,000 from the $1.5 million fair market value of the estate.

The result is a taxable estate of $1.44 million, which would be subject to 40% tax. This is a simplified calculation that doesn’t account for deductions or the effect of any applicable estate tax treaties, of which the US has 15.

Where property is jointly owned with a spouse who is a non-citizen, the amount the deceased non-domiciled non-citizen spouse contributed to the purchase of the asset will be subject to estate tax at their death. It may, however, be possible to defer the estate tax using a qualified domestic trust.

If the surviving spouse is a citizen, an unlimited amount of assets can pass to them tax-free due to the marital deduction.

To calculate the estate tax due, the estate of non-domiciled non-citizens must prepare and file Form 706-NA with the IRS. The form requires the disclosure of all the decedent’s assets, whether located in or outside the US. Based on my experience, many people are surprised and disturbed to learn that they must disclose their entire worldwide assets to the IRS even though only US assets are subject to the estate tax.

Finally, there’s the matter of getting the assets transferred from the decedent to their heirs. This generally requires the assets to pass through the lengthy and costly probate process. Where the estate isn’t administered by a qualified executor or administer acting within the US, a federal transfer certificate must be obtained from the IRS before the assets can be transferred to the heirs.

With proper advance tax planning, the US estate tax, as it applies to non-domiciled non-citizens, can generally be avoided. It is important to seek proper tax and legal advice before making any investment.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Jimmy Sexton is founder and CEO of Esquire Group and chairman of the International Business Structuring Association (Middle East Chapter).

Write for Us: Author Guidelines