By Stephanie Hathaway
International Tax Partner, Moss Adams LLP
Courtesy to The Bellingham Business Journal
The estate tax in the United States is well known, but it’s complex, making it difficult for some individuals to know whether, and to what degree, it might apply to them.
This is particularly true when international factors are involved.
Over certain thresholds, the estate tax is applicable to U.S. citizens, regardless of residency; U.S. residents, regardless of citizenship; and foreign individuals who own “U.S. situs” assets (see below). Many states, including Washington, also have separate estate-tax regimes.
So how does this break down?
The gross value of worldwide assets owned or controlled by a U.S. citizen or resident (a U.S. estate) is subject to estate-tax reporting if the value exceeds $5.25 million (for 2013). Administrators of estates in Washington must also file a state estate-tax return if gross assets exceed $2 million.
A U.S. estate is allowed deductions and exclusions that may reduce or eliminate the estate-tax liability. These are for items such as legal and accounting fees, estate administration expenses, costs to maintain estate assets, funeral and burial expenses, debts and mortgages, losses during estate administration, bequests to qualified charitable organizations and transfers to a spouse who is a U.S. citizen. If the spouse is not a citizen, tax-free transfers are limited under both federal and state laws, making proper planning even more important.
Non-U.S. estates that include more than $60,000 of U.S. situs assets are required to file an estate tax return. However, there are tax treaties that may provide relief for estates subject to tax in more than one country.
For example, smaller Canadian estates—those with worldwide gross assets of $1.2 million (U.S.) or less—are exempt as long as the U.S. assets are neither real property nor business property. To qualify for the exemption, the estate must file a U.S. estate-tax return and claim the treaty benefit.
Executors of non-U.S. estates with U.S. situs assets are sometimes surprised to learn that a U.S. estate-tax return is required. This requirement is often discovered after the due date for filing the return, at which point additional interest and penalties may be imposed and the estate may no longer be eligible to make certain advantageous tax elections.
While determining situs for specific trust or partnership assets and debt obligations requires a detailed fact pattern analysis, the most common U.S. situs assets include:
– Real estate in the United States
– Shares of stock issued by U.S. corporations
– Tangible personal property, including checks and cash, physically located in the United States
– Debt obligations issued by a U.S. entity or individual
– U.S. bank accounts, if connected to a U.S. trade or business
– Interest in some partnerships, including some LLCs, if the partnership owns U.S. real property or business property
– Most U.S. retirement plans and benefits
– U.S. assets held by a non-U.S. corporation, if the ultimate non-U.S. shareholder previously transferred the assets to the corporation or fails to respect the corporation’s separate dominion and control over the assets
– Assets owned by trusts, if the assets were U.S. situs either at the decedent’s date of death or when they were originally contributed to the trust (even if those assets were later sold and replaced with non-U.S. assets)
Estate tax rules in the United States are complex, particularly for individuals with international situations. With proactive planning, these individuals can quantify their U.S. estate-tax exposure, identify and implement strategies to reduce that exposure, and structure future activities with tax efficiency in mind.
Stephanie Hathaway can be contacted at 360-676-1920 or firstname.lastname@example.org.