Understanding the U.S. Estate Tax for Non-Residents

Introduction

The U.S. estate tax applies not only to U.S. citizens and residents but also to non-residents who own certain U.S. assets at the time of their death. Many foreign investors and non-resident aliens (NRAs) are unaware of how their U.S. assets may be taxed when they pass away. This article explores the U.S. estate tax rules for non-residents, including exemptions, tax rates, planning strategies, and how to minimize potential liabilities.

Who Is Considered a Non-Resident for U.S. Estate Tax Purposes?

For estate tax purposes, the U.S. defines residency differently than for income tax. A non-resident for estate tax purposes is someone who is not a U.S. citizen and does not have U.S. domicile at the time of death.

• Domicile means having a permanent home in the U.S. with the intention to stay indefinitely.
• Unlike income tax, which uses the substantial presence test, estate tax residency is based on subjective factors, such as time spent in the U.S., visa status, and personal ties to the country.

U.S. Estate Tax Threshold for Non-Residents

Unlike U.S. citizens and residents, who have a lifetime estate tax exemption of $13.61 million (for 2024), non-residents only get a $60,000 exemption on U.S.-situs assets.

• If the value of U.S. assets exceeds $60,000, the estate may owe U.S. estate tax.
• The estate tax rate ranges from 18% to 40% on the taxable portion of U.S. assets.

U.S. Estate Tax Brackets for Non-Residents 

Up to $60,000  Exempt from estate tax
$60,001 - $100,000  18% tax
$100,001 - $150,000 20% tax 
$150,001 - $250,000 23% tax 
$250,001 - $500,000 30% tax 
Over $1,000,000 40% tax

What U.S. Assets Are Subject to Estate Tax?

Non-residents are only taxed on U.S.-situs assets at death. These include:

U.S. Real Estate: Properties located in the U.S.
Stocks of U.S. Companies: Even if held in a foreign brokerage account.
Tangible U.S. Assets: Vehicles, collectibles, art, and personal belongings in the U.S.
Business Interests: Ownership in partnerships or LLCs with U.S. situs.

Non-Taxable Assets Include:

• Life insurance proceeds (even if the policy covers U.S. assets).
• Bank deposits in U.S. financial institutions (if classified as "portfolio interest")
• Non-U.S. real estate and non-U.S. business interests.

How Tax Treaties Can Reduce U.S. Estate Taxes

The U.S. has estate tax treaties with certain countries, including Canada, the U.K., Germany, France, and Japan. These treaties can:

• Increase the estate tax exemption for non-residents
• Reduce or eliminate double taxation on assets taxed in both the U.S. and the home country.
• Provide credits or deductions to offset estate tax liabilities.

For example, the U.S.-Canada Tax Treaty allows Canadian residents to receive the same estate tax exemption as U.S. citizens, prorated based on their U.S. assets as a percentage of their worldwide estate.

Estate Tax Planning Strategies for Non-Residents

To minimize or avoid U.S. estate tax exposure, non-residents should consider proactive tax planning:

1. Own U.S. Assets Through a Foreign Corporation
   • Instead of owning U.S. real estate or stocks directly, use a foreign corporation to hold these assets.
   • The corporation, not the individual, owns the U.S. property—shielding it from estate tax.
2. Use Non-Recourse Loans for U.S. Property
   • A non-recourse mortgage reduces the taxable value of a U.S. property for estate tax purposes.
   • Since non-recourse loans are deductible against the property’s value, this lowers the taxable estate.
3. Transfer Assets to Heirs While Alive
   • Non-residents can gift assets to heirs before death to avoid estate tax, subject to U.S. gift tax rules.
   • Gifts of non-U.S. assets are generally not taxable under U.S. law.
4. Utilize Trusts
   • A foreign grantor trust can hold U.S. assets while avoiding direct ownership by the non-resident, reducing estate tax exposure.
   • Irrevocable life insurance trusts (ILITs) can help cover estate tax liabilities.

How to File a U.S. Estate Tax Return as a Non-Resident

If a non-resident dies owning U.S. assets worth more than $60,000, the estate must file Form 706-NA (United States Estate Tax Return for Nonresidents).

Filing Deadlines:

• The estate tax return is due 9 months after the date of death.
• A 6-month extension can be requested using Form 4768.

Required Documents:

• Certified copy of the death certificate.
• List of all U.S. assets owned at the time of death.
• Appraisals or valuations of real estate and business interests.

Conclusion

Non-residents who own U.S. assets should carefully plan for U.S. estate taxes to avoid unexpected liabilities. With only a $60,000 exemption, foreign investors and heirs could face high tax bills without proper planning. By leveraging tax treaties, trusts, corporate structures, and other estate planning tools, non-residents can protect their wealth from excessive U.S. taxation.

Tax Partners can help you navigate U.S. estate tax laws and develop strategies to minimize your tax exposure.

This article is written for educational purposes.

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.

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