The Federal Estate Tax of Nonresident Aliens

This Article will briefly cover the consequences of a nonresident alien passing away owning U.S. situs property. For our purposes, nonresident alien means not a citizen and not a resident of the U.S. A resident is a person who acquires domicile in the U.S. by virtue of living here and having the intention to stay indefinitely.[1] The federal estate tax applies to the gross estate of a nonresident alien on all property, tangible or intangible, situated in the U.S., with certain exceptions, and U.S situs assets in which the decedent had an interest.

Section 2102(b)(1) provides a unified credit of $13,000 against the federal estate tax. The actual effect of this credit is to shelter the first $60,000 of the taxable estate. Nonresident aliens are subject to the same rate of tax under Section 2001 as are U.S. citizens and residents. For decedents dying after 2012, the rate of tax ranges from 18% to a top marginal rate of 40%. Estate tax treaties may modify what property is included in the gross estate, as well as exemptions, deductions, and credits which may be available to the estate of a nonresident alien decedent, among others.

Two of the most used strategies to eliminate or reduce the application of the federal estate tax rules include the use of a foreign corporation or the use of a foreign trust. Both strategies are complex and vary depending on the circumstances. The ultimate goal is to use the U.S. situs rules to the nonresident alien’s advantage by not having the property be included in his or her estate. This is not meant to be legal advice and you should always consult an attorney regarding your particular situation. Advanced planning in the area is advantageous as it can be very costly to pay the U.S. federal estate tax at the top marginal rate of 40%.

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[1] Reg. § 20.0-1(b)(1).