U.S. Estate Tax for Non-Citizens: Federal Rules

The United States federal government levies an estate tax, a tax on the total value of a deceased person’s assets before they are transferred to beneficiaries. This differs from an inheritance tax, which is paid by the individuals who inherit the property. For non-U.S. citizens with assets in the U.S., the estate tax is the responsibility of the decedent’s estate, not the heirs.

This article focuses exclusively on the federal estate tax rules for non-U.S. citizens. These rules are distinct and more stringent than those for U.S. citizens, making a clear understanding of them important for financial planning. State-level estate or inheritance taxes are not covered in this discussion.

Determining Tax Liability for Nonresident Aliens

For U.S. federal estate tax, a non-U.S. citizen’s liability hinges on their “domicile,” not their residency status or visa type. A person is considered domiciled in the United States if they live in the country with no definite present intention of leaving. This subjective test is determined by factors like family location, business ties, and the length of their stay.

A non-citizen domiciled in the U.S. is treated like a U.S. citizen for estate tax purposes. In contrast, a non-U.S. citizen who is not domiciled in the U.S. is classified as a “nonresident alien.” For these individuals, the federal estate tax applies only to their assets situated within the United States, also known as U.S. “situs” assets.

U.S. situs assets include tangible property like real estate, artwork, and vehicles physically located in the country. It also covers intangible assets such as stock in U.S. corporations, regardless of where stock certificates are kept. Certain assets are specifically excluded from U.S. situs for nonresident aliens, including stock in foreign corporations, proceeds from life insurance policies, certain deposits with U.S. banks, and qualifying portfolio debt instruments like some U.S. government and corporate bonds.

Calculating the Federal Estate Tax

The federal estate tax calculation for a nonresident alien begins with a much smaller exemption amount than for U.S. citizens. A nonresident alien’s estate is entitled to an exemption of only $60,000 on the value of their U.S. situs assets. This figure is significantly lower than the multi-million dollar exemption for U.S. citizens, meaning that relatively modest U.S. holdings can trigger a tax liability.

Once the total fair market value of the U.S. situs assets is determined, certain deductions can be subtracted to find the “taxable estate.” Allowable deductions include administrative costs and debts of the decedent. However, these deductions must be prorated based on the ratio of the value of the U.S. situs assets to the value of the decedent’s total worldwide estate, a calculation that requires full disclosure of all assets.

After subtracting prorated deductions, the federal estate tax is calculated by applying progressive tax rates to the taxable estate, which can be as high as 40%. For example, a nonresident alien with a U.S. property valued at $1,000,000 would subtract the $60,000 exemption, leaving a taxable estate of $940,000 and a substantial tax bill.

The Role of International Tax Treaties

The standard rules for taxing the estates of nonresident aliens can be modified by international tax treaties. The U.S. maintains estate and gift tax treaties with a number of countries to prevent double taxation and establish clearer rules. If a decedent was a citizen of a country with such a treaty, their estate may receive more favorable tax treatment.

A primary benefit offered by many tax treaties is a larger estate tax exemption. Instead of the standard $60,000, a treaty might allow the estate to claim a pro-rata portion of the much larger exemption available to U.S. citizens, calculated based on the ratio of the decedent’s U.S. assets to their worldwide assets.

Another common feature is a credit for taxes paid to the home country. This mechanism ensures an estate is not taxed twice on the same assets by both the U.S. and the decedent’s country of residence. The U.S. has treaties with countries such as Australia, Canada, France, Germany, and the United Kingdom. Because the benefits differ from one treaty to another, it is necessary to consult the specific agreement applicable to the decedent’s country.

Filing and Paying the Estate Tax

Preparation – Form 706-NA

The executor of a nonresident alien’s estate is responsible for filing Form 706-NA, the U.S. Estate Tax Return. This form is required if the fair market value of the decedent’s U.S. situs assets exceeds the $60,000 exemption threshold. Completing the form requires gathering specific documentation, including a certified copy of the will and a complete inventory of all U.S. situs assets with their fair market value.

If the estate claims deductions for debts and expenses, it must also provide a statement of the decedent’s worldwide assets to calculate the allowable prorated amount. If the estate is claiming benefits under an international tax treaty, this must be indicated on the form with information to substantiate the claim.

Procedure – Submission and Post-Filing

The filing deadline for Form 706-NA is nine months after the date of the decedent’s death. An automatic six-month extension to file can be requested by submitting Form 4768 before the initial deadline passes. Payment of any estate tax due is expected when the return is filed.

A key step in settling the estate is obtaining a Federal Transfer Certificate from the IRS. This document is required by U.S. financial institutions before they will release a decedent’s assets to an executor. The certificate serves as proof that federal estate tax obligations have been satisfied and is generally required even if no tax was due.

Estate Planning Strategies

Nonresident aliens who own or plan to acquire U.S. assets can use several strategies to legally manage potential U.S. estate tax.

• Lifetime Gifting: The rules for lifetime gifts differ from estate tax rules. While gifts of U.S. real estate are subject to U.S. gift tax, gifts of intangible property, such as stock in U.S. corporations, are not. This allows a nonresident alien to gift U.S. stocks to heirs without tax, even though those same stocks would be subject to estate tax if held at death.
• Asset Structuring: Holding U.S. situs assets, like real estate, through a foreign corporation is an effective strategy. The individual owns shares in the foreign corporation, not the U.S. assets directly. Since stock in a foreign corporation is not a U.S. situs asset, this can remove the property’s value from the U.S. estate.
• Using Trusts: Placing U.S. assets into a properly structured foreign trust can shield them from U.S. estate tax. By avoiding direct ownership, those assets may be excluded from the taxable estate, though this complex strategy requires professional guidance.
• Purchasing Life Insurance: This strategy provides funds to pay the tax rather than avoid it. Since life insurance proceeds paid to a beneficiary are not U.S. situs assets, a policy can create liquidity to cover the tax liability without forcing the sale of U.S. property.
• Careful Asset Selection: Nonresident aliens can focus their U.S. investments on assets that are exempt from the estate tax. This includes certain U.S. government bonds and corporate debt instruments that qualify as “portfolio debt,” allowing for U.S. investment without creating an estate tax obligation.