Understanding US Estate Tax: Implications and Strategies for Nonresident Aliens

Disclaimer: The following information is provided for general informational purposes only and should not be construed as legal, financial, or tax advice. Consult with a qualified professional before making any decisions based on this content.

The US Gift and Estate Tax Explained The United States imposes a unique tax known as the US Gift and Estate Tax on non-resident aliens holding assets valued over $60,000. This tax comes into play when these individuals either pass away or gift their assets. It's crucial for nonresident aliens to understand this tax and explore strategies to protect their assets and beneficiaries. In this article, we delve into the intricacies of the US Gift and Estate Tax, its implications, and potential safeguards. The US Gift and Estate Tax targets various asset classes, including real estate, securities like stocks of US companies, and, in specific cases, bank accounts. The tax rate is progressive and structured into different slabs based on the value of the assets. Here's an overview of the estate tax rates and corresponding taxable amounts over $60,000:

For instance, if a nonresident alien holds US company stocks valued at $400,000, they would be subject to a 34% estate tax rate, resulting in a tax liability of$136,000.

Key Considerations Several important factors come into play when dealing with the US Gift and Estate Tax: 1. Valuation Basis: The tax is calculated based on the current market value of the assets, not their purchase value. Additionally, asset values are not adjusted for inflation. 2. Filing Requirement: Nonresident aliens must file an annual W-8 form that provides details about their assets holdings. 3. International Treaties: The US has estate tax treaties with several countries, including Australia, Finland, Japan, and more. These treaties may influence tax liabilities for nonresident aliens from treaty countries.

Implications Upon Passing When a nonresident alien holding US-based assets passes away, their asset accounts are frozen until the required documentation is submitted to the US Internal Revenue Service (IRS), and all applicable estate taxes are paid. Beneficiaries must inform authorities of the passing and submit Form 706-NA within nine months. Failure to comply can lead to penalties. Moreover, if beneficiaries sell the assets and transfer funds before fulfilling tax obligations, tax authorities can impose penalties of up to 35% of the asset's market value. In our opinion, in today’s date due to banking globalization and improved exchange of information, the US government has signed several FATCA orders with numerous countries, including India. Thereby being a signatory, India adheres to the common reporting standards and thus, it would be illegal to avoid paying the relevant estate taxes.

Safeguarding Against Estate Taxes There are three primary methods to protect families and beneficiaries from estate taxes:

1. International or Personal Portfolio Bond: A platform solely for the purpose of holding international assets namely shares and stocks, which is held outside the US.

2. Partnership Firms and Corporate Structures: These legal entities can offer tax advantages and help in managing estate tax exposure.

3. Trust Planning: Trust planning for US Estate Tax involves strategic allocation of assets to minimise estate tax liability while ensuring your wishes are carried out.

In conclusion, understanding the US Gift and Estate Tax is crucial for nonresident aliens holding assets in the United States. Proper estate planning and adherence to tax regulations can safeguard assets and beneficiaries from unnecessary tax liabilities. Given the global exchange of financial information and international treaties, it's imperative to address these matters diligently and responsibly.

Disclaimer: The information provided in this article is for informational purposes only and should not be construed as legal, financial, or tax advice. Consult with qualified professionals before making any decisions.