June 17, 2005

Thomas C. Roberge, CPA
St. Petersburg and Sarasota
 
Telephone (727) 822-9393 Contact: TaxInfo@RobergeCo.com

Copyright, 2005, Thomas C. Roberge
All Rights Reserved

Several people have asked what is the big deal about U.S. estate taxes for foreigners if there is a $1.5 million exemption this year (increasing to $2 million next year).

The answer is that the $1.5 million exemption is only available to U.S. decedents.  Nonresident alien decedents only receive a $60,000 exemption.  The estate tax is levied on the fair market value of the decedent's U.S. assets at the time of his or her death.  We will explain more about that in a minute.

The following chart illustrates the U.S. estate tax on a foreign decedent at various levels.

Even if the property is in joint name (as with a husband and wife) the entire fair market value of the U.S. assets at the time of the decedent's death is taxed to the decedent unless it can be demonstrated that the surviving spouse not only had assets to contribute toward the original purchase price, but in fact did contribute those assets.  This is a very technical area that we will not explain in this newsletter other than to say that it is one of the biggest issues we deal with on IRS examinations of nonresident estate tax returns.

Many people think that the U.S. estate tax is only applied on the foreign investors net U.S. equity (that is the fair market value of the U.S. assets reduced by mortgages and loans against it).  This is not true.  The estate tax is levied on the total fair market value of the foreign decedent's U.S. assets with only a pro-rata deduction for debt and expenses at the time of death determined using a formula based on the value of their worldwide assets.

The planning for foreign nationals in this area can get quite involved because of numerous tax and non-tax issues that the foreign decedent's personal representative may have to deal with.  It is in your foreign client's best interest to suggest that they obtain competent advice to minimize their U.S. estate tax exposure.  Let's say that you have John and Mary Smith, clients  of yours from Country X, who purchased a Florida condominium from you that is now worth $1 million.  It is their only U.S. asset.  If John or Mary dies in an untimely accident, their heirs could be faced with a U.S. estate tax liability as high as $332,800.  It is never too early to start planning to minimize this financial risk. 

Frequently, there are strategies and planning techniques that can minimize and often eliminate the estate tax exposure that foreign individuals face when dealing with their U.S. investments (including real estate).  The tax planning in this area is not something that can be "boiler-plated" in a "cookie cutter" type solution.  It would be great if it could be handled that way - but it can't.  It has to be designed to meet the foreign individual's particular situation.  The foreigner may have other U.S. real estate, or they may have other U.S. situs assets such as securities, etc. that could impact their planning needs.

The rules and strategies for foreign individuals are considerably different than those that apply to U.S. persons.  We have personnel on our staff that have considerable experience in estate tax planning for foreign individuals.  We welcome referrals of your foreign clients so we can assist them and their families in minimizing their U.S. estate tax exposure.  Feel free to contact us or have your clients contact us in this regard.