Thanks to globalization, many of us have family all over the world. If you live outside the U.S., but have relatives in the U.S., you may someday find that you have been named a beneficiary of a will governed by U.S. law. You might also find that even though your recently departed relative lived outside the U.S. at the time of their death, they have bequeathed to you U.S.-based assets (e.g. real estate, tangible personal property, U.S. company securities).
Under the U.S. common law system – different to civil law that holds in most of continental Europe, Asia, Africa and other places – an estate does not pass directly to heirs and beneficiaries but is held by an executor or court-appointed estate representative who bears responsibility for satisfying the decedent’s debts and distributing the estate’s assets.
For U.S. citizens, most relatively simple estates (cash, publicly traded securities, small amounts of other easily valued assets, and no special deductions or elections, or jointly held property) do not require the filing of an estate tax return. A filing is required for estates with combined gross assets and prior taxable gifts exceeding $11,700,000 in 2021. However, an executor for a non-resident, non-U.S. citizen must file an estate tax return if the fair market value at death of the decedent’s U.S.-based assets exceeds $60,000. This means that privately held assets with fair market value in excess of $60,000 will be taxed at between 18-40 percent.
Estate and inheritance taxes imposed by U.S. states
On inheriting U.S.-based assets, non-resident, non-U.S. citizens may incur tax obligations not only to the U.S. federal government, but also to the state(s) where the assets are located, and the state estate tax exemption, if any, may be much lower than the federal exemption. Also, rather than imposing estate taxes on the assets of the decedent, several states impose inheritance taxes on the distributions to beneficiaries (one state, Maryland, imposes both an estate tax and an inheritance tax).
Several states also impose a state gift tax. This means that residents of any other state may be able to significantly reduce or even eliminate their state estate tax by making gift transfers during their lifetimes. And in some cases, inherited assets may include an income-producing component that creates U.S. income tax obligations for non-resident beneficiaries, and as a general rule, distributions to the foreign beneficiaries are subject to federal withholding.
Depending on your circumstances, you may be subject to the terms of one (or more) tax treaties that have been agreed between the U.S. and other countries. Estate tax treaties may provide more favorable treatment than that provided for in the general tax regulations. The U.S. Treasury publishes the text of most tax treaties currently in force, but it is wisest to consult an experienced estate tax attorney.
What can be done to mitigate this tax liability? If you are a non-resident, non-U.S. citizen who may someday inherit U.S.-based real estate or securities that have significant value from relatives or friends, you may want to enquire about their preparedness for the estate tax issue.
Investment can be made through a corporation, limited liability company, or (irrevocable) trust. There are pluses and minuses (e.g. capital gains and income tax considerations) to investment through each of these vehicles that are dependent on the investor’s circumstances, and again, consultation with an estate planning attorney is advisable.
What if you are involved in an inheritance dispute?
The death of a loved one is an emotional time, and sometimes a decedent’s heirs or beneficiaries disagree with the decedent’s bequests, or their interpretation. Disputes can also arise over the validity of the will, or the cognitive capacity of the decedent at the time the last will was written. Further, disputes can arise over the decedent’s choice of executor.
In a dispute, or if there is any uncertainty about the validity of the will or the asset distribution process, it may make sense to apply for probate. Probate is the judicial process through which a will is “proved” in court, and the probate process allows the executor (and beneficiaries) to confirm the legitimacy of the decedent’s will, to confirm the value of the decedent’s assets, to pay any outstanding debts and taxes (which may require selling assets), and to distribute the decedent’s bequests to the heirs and beneficiaries. The probate process also makes public the entire asset allocation and distribution process, and provides court supervision over the executor’s actions, which can be a plus in instances in which there are disputes. It is worth noting, however, that the probate process costs time (it can hold up the distribution of assets) and money.
Especially in an estate dispute, which can be costly for all parties, it is critical to have experienced legal counsel on your side to help you achieve the most favorable resolution, whether via negotiation, mediation or litigation. In addition, having worked in more than 20 countries around the globe, we have found our knowledge of diverse cultures extremely helpful in understanding both sides of a dispute, and in attaining the best outcome.
Different jurisdictions operate different legal systems, and there is no substitute for proven expertise when it comes to challenging legal issues. Our attorneys have deep legal knowledge and experience, fluency in in Mandarin Chinese, German, Spanish and French, and a client-first approach that ensures our clients consistently receive the highest standard of service.