For the families of non-resident, non-U.S. citizens who own assets in the United States at the time of their death, the requirements of the U.S. estate tax laws, including the Transfer Certificate, can be a very unwelcome surprise.
Non-resident non-U.S. citizens are subject to U.S. estate tax on their American assets that exceed the value of $60,000 on the date of death. Assets subject to taxation include real property, tangible personal property (such as artwork, antiques, automobiles) and stock of U.S. companies. The situs of the actual stock certificate itself is not a factor in determining the taxability of the asset. Shares of a cooperative apartment are subject to estate tax (but not gift tax, unlike gifts of real estate). There are certain exceptions such as bank accounts not used in connection with a trade or business in the United States and insurance proceeds.
A Transfer Certificate issued by the Internal Revenue Service will be required by the financial institutions (or title company if the asset is real estate) for the estate of a non-resident, non-U.S. citizen and foreign Executor. The process to obtain this Transfer Certificate is long and expensive.
For these decedents, Form 706NA, United States Estate (and Generation-Skipping) Tax Return for Estates of a Nonresident not a citizen of the United States must be prepared and filed for estates with American assets worth more than $60,000. Lifetime gifts by the decedent are also included in the estate, subject to an annual gift tax exclusion for each done (currently $15,000) and an annual marital deduction for gifts to a spouse of $100,000. The maximum tax rate is 40%, subject to a $60,000 lifetime exemption. Once the estate tax liability is satisfied, the IRS issues a discharge known as a Transfer Certificate which confirms the satisfaction of the estate tax liability on the American assets (listed individually on the certificate). The Transfer Certificate is then presented to the financial institution for further processing. There may be additional documentation than required (which will be covered in a future alert).
The processing time for an IRS review of these estate tax returns can be upwards of nine months (not including if the estate is selected for audit which can then extend the time frame by years). The value of the assets, especially securities, can fluctuate dramatically in either direction before the foreign Executor is able to “control” those assets. Additionally, the payment of the estate tax can be problematic depending on the nature of the decedent’s worldwide assets.
Estate Tax Treaties between the U.S. and other countries should be reviewed for favorable tax treatment. Not all countries have an estate tax treaty with the U.S. but residents of those countries that do are entitled to benefits including reduced tax rates or additional exemptions for certain types of assets.
Foreign estates with a U.S. Executor are not subject to the Transfer Certificate requirement. If possible, a foreign Executor may consider filing the decedent’s Will in a U.S. jurisdiction (usually where the decedent had the most contacts). For foreign estates with real property in the United States, the executor may want to file the foreign Will for ancillary probate in the county of the State where the real property is located. This ancillary probate proceeding can expedite the estate administration and distribution to the heirs. The estate tax liability remains but the requirement for the Transfer Certificate is eliminated. However, a U.S. Executor who resides in the U.S. is necessary. Even with a U.S. executor, the probate courts of certain jurisdictions may require evidence that the estate tax has been paid.
There are many complications for a person with worldwide assets. Especially if such person is not a resident or citizen of the country imposing taxation. A thorough review of a non-resident, non-citizen’s estate plan is essential. With careful planning, the navigation through the U.S. estate tax requirements can be eased and burdens to the families eliminated.
Should you have any questions or desire further insight, feel free to contact one of the members of our Tax Department: