US Estate Tax for Non-US Investors in US Assets

Many multinational millionaires know that Americans are subject to income tax on our worldwide income, and estate tax on our worldwide assets at death, but far fewer foreigners seem aware of how US taxes can snare non-US persons with US investments. Foreigners who have bought US dividend-paying stocks have probably seen US withholding taxes as high as 30% withheld from their dividend payments, but may not pay much attention unless these dividends are a significant share of that person’s investment income. The bigger tax trap I want to highlight here is how the US estate tax can trap non-US investors with significant US assets.

The US estate tax, also known as the death tax, is one tax many of us don’t like to think about, because we ourselves won’t pay it until after we’re dead. Those who are most aware of the US estate tax (or any inheritance tax) tend to be those who have inherited from an estate that ended up with a large (often surprise) tax bill. Owners of US assets, whether Americans or not, are expected to file a US estate tax return on death, and the threshold for non-US investors to do so is only US$60,000 in US situs assets. “US situs assets” generally include US stocks, real estate, private businesses, and cash in brokerage accounts, but oddly enough, not cash in a bank account or many types of US bonds.

One US estate tax lawyer once joked with me that if I have a non-US client with more than US$60,000 of US stocks, ETFs or funds, that I should sell them and immediately buy US treasuries, or transfer the funds to a bank account, as soon as I find out they are on the way to the hospital. While it is easy enough to do this with liquid stocks and funds, the US estate tax is clearly a far bigger challenge for foreign individuals invested in physical US real estate. There are some countries that have estate and gift tax treaties with the US, but residents of other countries may consider either becoming US taxpayers or transferring to a structural solution. I covered some of these in my earlier article on US tax structures for Hong Kong residents.