IRC 2104: U.S. Situs Assets for Non-Resident Aliens

Internal Revenue Code (IRC) Section 2104 provides the framework for identifying which assets of a non-resident alien (NRA) are considered located within the United States for federal estate tax purposes. Understanding which assets fall under U.S. tax jurisdiction is necessary for calculating potential estate tax liability and for proper estate administration.

The U.S. federal estate tax exemption for a non-resident alien is only $60,000. This amount, which is not indexed for inflation, is significantly lower than the exemption provided to U.S. citizens and domiciliaries. Consequently, a comparatively smaller U.S. estate can trigger a tax liability for an NRA. However, an estate tax treaty between the United States and the decedent’s country of domicile may provide a more generous exemption.

Determining Non-Resident Alien Status for Estate Tax

For U.S. estate tax purposes, an individual’s status is determined by their “domicile” at the time of death, not their residency. Domicile is defined as living in a particular place with no definite present intention of leaving. This requires a physical presence in a place and the concurrent intention to make that place one’s home indefinitely.

This concept differs from the tests used for U.S. income tax, such as the “green card test” or the “substantial presence test.” An individual can be a U.S. resident for income tax purposes yet remain domiciled elsewhere for estate tax purposes. For example, a person living in the U.S. on a non-immigrant work visa may be an income tax resident but could be considered domiciled in their home country if they always intended to return.

U.S. citizens and domiciliaries are subject to estate tax on their worldwide assets. In contrast, non-resident aliens are only subject to U.S. estate tax on assets deemed to be situated within the United States. The burden of proof is on the estate to demonstrate that the decedent was not domiciled in the U.S. at the time of death.

U.S. Situs Assets

Internal Revenue Code Section 2104 and related Treasury Regulations specify which assets are considered to have a U.S. situs for estate tax purposes. Real property physically located in the United States is the most direct category of a U.S. situs asset. This includes residential homes, commercial buildings, and any interest in real estate within U.S. borders.

Tangible personal property is also a U.S. situs asset if it is physically present in the United States at the time of death. This category includes items such as jewelry, furniture, vehicles, and artwork. Cash located in a U.S. safe deposit box is also considered tangible personal property situated in the U.S.

Shares of stock issued by a U.S. corporation are deemed to be U.S. situs assets, regardless of where the physical stock certificates are located. An NRA who owns stock in a company incorporated in the U.S. holds a U.S. situs asset, and this rule applies to both public and private corporations.

Debt obligations of U.S. persons, the U.S. government, a state, or any political subdivision thereof are also classified as U.S. situs assets. This includes bonds issued by U.S. corporations and government entities. There are, however, exceptions to this rule, most notably for portfolio debt.

Assets Not Considered U.S. Situs

The Internal Revenue Code provides several exceptions, identifying assets that are not considered situated in the U.S. for estate tax purposes. A primary example is the proceeds from a life insurance policy on the life of an NRA, which are excluded from the U.S. estate.

Another exception applies to certain bank deposits. Deposits with U.S. banks and interest-bearing accounts with insurance companies are not treated as U.S. situs assets, provided the interest earned is not “effectively connected” with a U.S. trade or business. This allows NRAs to hold cash in U.S. financial institutions without subjecting it to estate tax.

The “portfolio debt” exception is a planning tool. Under this rule, debt obligations that generate portfolio interest are not considered U.S. situs assets. This includes many U.S. corporate bonds and government securities held by an NRA, as long as specific registration and ownership requirements are met.

Shares of stock in a foreign corporation are not U.S. situs assets, even if that corporation’s primary assets consist of U.S. property. Additionally, a specific rule exempts works of art owned by an NRA if they are imported into the U.S. solely for exhibition at a public gallery or museum and are either on display or in transit at the time of death.

Special Considerations for Trusts and Transfers

The U.S. situs rules extend beyond assets directly owned by a non-resident alien at death. Certain provisions can “pull back” transferred assets into the decedent’s U.S. estate. The rules apply if the property was situated in the U.S. either at the time of the transfer or at the time of the decedent’s death.

If an NRA transfers U.S. situs assets, such as stock in a U.S. corporation, into a revocable trust, the value of those assets is included in their U.S. estate. Because the decedent retained the power to revoke the trust and reclaim the assets, they are treated as still owning the property for estate tax purposes.

Property is included in the U.S. estate if the decedent transferred it but retained a life estate. This means the individual kept the right to use, possess, or enjoy the property, or receive the income from it, for their lifetime. If an NRA transfers a U.S. vacation home to their children but retains the legal right to use it for life, the home’s value will be included in their U.S. estate.

The rules also apply to transfers that are intended to take effect at death. These are situations where the recipient’s possession or enjoyment of the property is contingent upon surviving the decedent. The principle is that transfers where the decedent retains significant control over U.S. situs property are treated as if the transfer never occurred for estate tax purposes.