U.S. Estate Tax for Non-Americans

What is the U.S. Estate Tax?

The U.S. estate tax is a tax that is levied on the transfer of assets from a deceased individual's estate to their heirs or beneficiaries. Due to U.S. estate tax thresholds, many American citizens and residents are not affected by this. However, this tax can be a significant burden for non-resident aliens who own U.S. assets. Non-resident aliens are defined as people who are not U.S. citizens, do not live in the U.S., and do not hold a green card.  

Michael Garcia, our dedicated U.S. Private Wealth manager will elaborate on the U.S. estate tax and it’s impact on non-resident aliens who own U.S. assets in this article.

First, it is important to understand how the U.S. estate tax works. The U.S. estate tax is based on the fair market value of the assets that are subject to the tax at the time of the owner's death. For U.S. citizens and residents, the tax applies to all assets they own worldwide. However, for non-resident aliens, the tax only applies to their U.S. assets.  

This article will focus on the federal estate tax, but it is important to be aware that some states also have their own estate taxes.

Estate Tax Thresholds for U.S. Citizens and Non-Resident Aliens

The U.S. estate tax is levied on the total value of the assets that exceed a certain threshold. In 2023, the exemption threshold for U.S. citizens, residents, and green card holders is $12.92 million per individual. This means that if an individual's assets are worth less than $12.92 million, they will not be subject to the estate tax. If their assets are above that threshold, only the excess value will be subject to the estate tax.

For non-resident aliens, the estate tax threshold is significantly lower. In 2023, the exemption threshold for non-resident aliens is only $60,000. This means that if a non-resident alien owns U.S. assets worth more than $60,000, their estate will be subject to the U.S. estate tax at a rate from 18% to 40%, depending on the value of the estate.

Implications for Non-Resident Aliens Owning U.S. Shares

If a non-resident alien owns US shares that are worth more than $60,000 at the time of their death, their estate will be subject to the U.S. estate tax. This could be a significant burden for their heirs or beneficiaries, as they will be required to pay up to 40% of the value of the shares that exceed the $60,000 threshold.

Strategies to Reduce Estate Tax Liability

There are, however, some ways that non-resident aliens can reduce their exposure to the U.S. estate tax.  

Establishing a Trust

By transferring ownership of the shares to a trust, the non-resident alien can reduce their estate tax liability. However, establishing a trust can be complex and expensive, and it may not be suitable for everyone. At Melbourne Capital Group, we can help you by working with trusted partners in establishing a trust that is in line with your estate plan.

Annual Gift Tax Exclusion

In 2023, the annual gift tax exclusion is $17,000 per recipient. This means that a non-resident alien can give up to $17,000 worth of shares to each of their heirs or beneficiaries each year without incurring any gift tax or estate tax. By making gifts of shares over a period of years, the non-resident alien can reduce their estate tax liability.

Utilizing International Insurance Structures
By transferring the shares into an international insurance structure, the non-resident alien becomes the beneficial owner of a policy, with the insurance company becoming the legal owner of the shares. The non-resident alien is deemed to have relinquished all legal rights to the shares, and is therefore no longer subject to U.S. estate tax on death, while still keeping the exposure to share price fluctuations and dividend income.

It is important to note that the U.S. has estate tax treaties with several countries. These treaties can provide relief from the U.S. estate tax for non-resident aliens who are residents of treaty countries. Currently, no country in Southeast Asia has this treaty with the U.S.

In conclusion, the U.S. estate tax can be a significant burden for non-resident aliens who own U.S. shares. With a threshold of only $60,000 and a tax rate of up to 40%, the estate tax can significantly reduce the value of an individual's estate. However, there are ways that non-resident aliens can reduce their exposure to the U.S. tax system.

Take Action: Secure Your Assets and Preserve Your Wealth

Navigating the complexities of the U.S. estate tax as a non-resident alien can be daunting. However, you don't have to do it alone. We harness relevant expertise and put together a team of banking, legal, and accounting experts that we work in partnership with to develop an all-encompassing international estate plan.

Our goal is to help protect your assets and preserve your wealth. We offer guidance on multi-generational financial solutions that not only safeguard your assets but also ensure the preservation of your wealth, allowing you to pass it on to your loved ones.

Don't leave your estate to chance. Speak to Michael Garcia today at michaelgarcia@melbournecapitalgroup.com to start planning for the future. Your loved ones deserve the security and peace of mind that comes from knowing your estate is in good hands.

Michael Garcia is Melbourne Capital Group's dedicated U.S. Private Wealth Manager with a decade-long experience of living abroad as an American. Michael's dedication and expertise in handling the complex world of international taxation and reporting requirements enable him to provide exceptional services to his clients across South East Asia.