What Are Estate Tax Treaties and How to Claim Benefits?

An estate tax treaty is a bilateral agreement between the United States and another country designed to address the taxation of a person’s assets upon their death. The primary purpose of these agreements is to prevent the same assets from being taxed by both countries, a situation known as double taxation. They establish rules to determine which country has the primary right to tax an estate’s assets, which is important for non-U.S. citizens who own property in the United States.

These treaties can offer tax relief. For non-U.S. citizens with U.S. investments or property, a treaty can alter standard tax rules in their favor. For U.S. citizens who own assets in a treaty country, these agreements provide a clear framework for how their estate will be taxed abroad. The existence of a treaty can mean the difference between a substantial tax liability and a more manageable one.

Determining Treaty Applicability

The United States currently has estate and/or gift tax treaties with Australia, Austria, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, South Africa, Switzerland, and the United Kingdom. If a decedent was a citizen or resident of one of these countries, their estate may be eligible for treaty benefits. The application of these treaties hinges on the concept of “domicile,” a distinct legal standard separate from residency and citizenship. An individual can be a resident of one country for income tax purposes but be domiciled in another for estate tax purposes.

Domicile is defined as the place where a person has their true, fixed, and permanent home and to which they intend to return whenever they are absent. Unlike residency, which can be established by physical presence, domicile involves an element of intent. To determine a decedent’s domicile, tax authorities examine factors like the location of their permanent home, family and social connections, business interests, and voter registration.

Because an individual could be considered domiciled in both the U.S. and a treaty country, treaties contain a series of “tie-breaker” rules to assign a single domicile for tax purposes. These rules are applied sequentially:

• The first test looks at where the individual had a permanent home available.
• If a permanent home was in both countries, the analysis moves to the country where personal and economic relations were closer, known as the “center of vital interests.”
• Should the center of vital interests be indeterminate, the next tie-breaker is the country of “habitual abode,” meaning where the individual spent more time.
• If that fails to resolve the issue, the final tie-breaker is citizenship.

A standard provision in most U.S. tax treaties is the “saving clause.” This clause preserves the right of the United States to tax its own citizens and residents as if the treaty did not exist. Consequently, a U.S. citizen living abroad in a treaty country generally cannot use the treaty to reduce their U.S. estate tax liability. The primary beneficiaries of estate tax treaties are the estates of decedents who were domiciled in a treaty country but were not U.S. citizens.

Key Treaty Provisions Modifying U.S. Estate Tax

Once it is established that a treaty applies, several provisions can alter the default U.S. estate tax rules for non-residents. One modification involves the “situs” of assets. Situs refers to the location of an asset for tax purposes, and under U.S. law, assets like U.S. real estate and stock in American corporations are considered U.S. situs property, subject to estate tax. Treaties can change these rules.

For example, the U.S. estate tax treaty with Germany modifies the standard situs rule for corporate stock. While U.S. law treats shares in a U.S. corporation as U.S. situs assets, the treaty may provide that such shares are only taxable in the country where the decedent was domiciled. This means for a German domiciliary owning stock in a U.S. company, the treaty would shift the primary taxing right from the U.S. to Germany.

Another benefit is the enhancement of the unified credit. For the estate of a non-resident, U.S. law provides a tax exemption of only $60,000, with assets above this amount facing tax rates up to 40%. Many treaties replace this small exemption with a more generous credit. Some provide a pro-rata unified credit, calculated based on the ratio of the decedent’s U.S. assets to their total worldwide assets. This allows the estate to apply a portion of the much larger exemption available to U.S. citizens, which is over $13 million and adjusted annually for inflation.

Other treaties, such as the one with Switzerland, provide a specific, enhanced credit amount that is significantly higher than the statutory $60,000. Treaties can also provide for a marital deduction that would otherwise be unavailable. U.S. tax law disallows the unlimited marital deduction for assets transferred to a surviving spouse who is not a U.S. citizen. This rule is intended to prevent assets from leaving the U.S. tax system without ever being subject to estate tax. However, certain treaties, like the one with France, contain provisions that allow for a marital deduction for transfers to a non-citizen spouse, subject to certain conditions.

How to Claim Treaty Benefits

Claiming treaty benefits requires the executor to gather specific documentation, complete the required forms, and formally file the estate tax return. The central form is Form 706-NA, the “United States Estate (and Generation-Skipping Transfer) Tax Return, Estate of nonresident not a citizen of the United States.”

Information Required for the Claim

The executor must provide substantial evidence to prove the decedent’s domicile in the treaty country. This is not a simple declaration but requires a collection of documents. Key documents include the decedent’s foreign passport and residency permits, along with evidence of a permanent home, such as property deeds or long-term lease agreements. Records of voter registration, social club memberships, foreign bank statements, and details of business interests outside the U.S. are also persuasive.

A complete and detailed inventory of the decedent’s worldwide assets is also required. This is because many treaty provisions, particularly the pro-rata unified credit, are calculated based on the proportion of U.S. assets to the total global estate. The executor must list all assets owned by the decedent at death, regardless of location, and value each at its fair market value. This often requires formal appraisals for assets like real estate or business interests.

For all assets determined to have a U.S. situs, specific information is needed. For real estate, this includes the property’s full address and appraisal. For stocks in U.S. corporations, the executor needs to list the company name, number of shares, and CUSIP number. For U.S. bank accounts, account numbers and date-of-death balances are required.

The Filing Process

The completed Form 706-NA must be filed with the Department of the Treasury, Internal Revenue Service, Kansas City, MO 64999. The filing deadline is nine months after the date of the decedent’s death, although a six-month extension can be requested by filing Form 4768. A critical step is attaching a treaty-based return position disclosure statement to the return.

This disclosure must identify the specific treaty and the articles under which benefits are being claimed. It must also contain a summary of the facts supporting the claim, such as the basis for determining domicile, and an explanation of the treaty provision being applied. Some situations may also require filing Form 8833. Failure to include this disclosure can result in the denial of treaty benefits.

Once the return is filed, the executor can expect a review period by the IRS. The agency may request additional information to support the treaty claim. Responding to these requests promptly is important for the successful processing of the return. If the return is accepted, the IRS will eventually issue an estate tax closing letter, which confirms that the federal estate tax liability has been satisfied. The timeline for receiving this letter can vary, often taking a year or more from the filing date.