Ethan R. Okura
Hawai‘i Herald Columnist
This is the third column in my series on international estate planning. I started with the basics of international estate planning in July. Then, last month, I discussed some of the gift and estate tax issues associated with transferring assets to a non-citizen spouse. In this column, I’ll cover some of the concerns faced by non-resident aliens who own U.S. situs assets and want to transfer them. It generally doesn’t matter if the non-resident alien is transferring assets to a U.S. citizen or a U.S. resident or even to another non-resident alien.
U.S. Situs Assets
You’re probably wondering: What are U.S. situs assets? The basic rule is that if assets are located (situated) in the United States, they are considered “U.S. situs.” All real estate (e.g., land, homes, buildings) located in the U.S. is considered U.S. situs. All tangible personal property (e.g., artwork, rugs, furniture, computers, gold coins, cash not deposited in a bank and held as physical currency) located in the U.S. is considered U.S. situs. The tricky part is what we call intangible personal property (e.g., patents, copyright, life insurance contracts, securities investments like stocks and bonds, and partnership and LLC membership interests). Sometimes you might think an item of intangible personal property would be considered U.S. situs, only to learn that it is not. There are even certain items of intangible personal property that are considered U.S. situs for estate tax purposes, but not for gift tax purposes. Talk about confusing!
Estate Tax for Non-Resident Aliens
If you are a foreigner who is not a U.S. resident, but you own U.S. situs assets, there will likely be an estate tax when you pass away. The first $60,000 of U.S. situs assets that you own are exempt from estate tax, but all U.S. situs assets over that amount are subject to estate tax. This includes all real property and tangible personal property located in the U.S., plus the following items of intangible personal property:
• U.S. equities (stock in U.S. companies, regardless of whether public or private, including stock in a co-op apartment corporation and shares in a U.S.-registered investment fund, including mutual funds);
• Non-bank deposits such as cash accounts with a U.S. brokerage fund (these are not considered exempt bank deposits and are also subject to estate tax); and
• Intellectual property (if the U.S. issued the primary patent, copyright or trademark, it is usually taxable. If not, there is some gray area here under the law depending on the facts.).
The following items of intangible personal property are generally NOT taxed in the estate of a non-resident alien (even though they may appear to be U.S. situs):
• Life insurance proceeds on the life of the taxpayer (even if the policy is with a U.S. insurance company); and
• U.S. bank deposits.
It appears that U.S. government, corporate and personal bonds or promissory notes would be included in a non-resident alien’s estate, but there are some exceptions that may exclude most bonds issued by U.S. corporations for most non-resident aliens. The law around this point is quite complex and actually depends on whether the non-resident alien (for estate tax purposes) was also a non-resident alien for income tax purposes in the year of death. Another point of interest is that money deposited in a bank account is considered intangible personal property and exempt from estate tax (even if it’s in a U.S. bank), but cash physically stored in a safe deposit box in a U.S. bank (or kept anywhere within the U.S. and owned by the taxpayer) is considered tangible personal property and is taxable as part of the estate.
Gift Tax for Non-Resident Aliens
Non-resident aliens are allowed the annual exclusion against gift tax (in 2019, $15,000 can be gifted tax-free to any number of individuals — and this can be done every year). However, they are not allowed to apply their estate tax exemption (lifetime total of $60,000) to their gift tax liabilities during their lifetime, whereas U.S. citizens and residents can apply their estate tax exemption (lifetime total of $11,400,000 in 2019) against gifts made during their lifetime.
Additionally, there are some other strange differences between the U.S. situs rules pertaining to gift tax and estate tax for non-resident aliens, depending on what kinds of assets are being transferred. For example, although U.S. equities (stocks of U.S. corporations, etc.) are taxable in a non-resident alien’s estate, they are not subject to gift tax when transferred during your lifetime.
This area of law is quite complex and there are many inconsistencies that do not make any logical sense. So, if you know any non-citizens who are also not U.S. residents, be sure to advise them to seek professional assistance about how they should own and transfer assets in the U.S.
© OKURA & ASSOCIATES, 2019
Honolulu Office (808) 593-8885
Hilo Office (808) 935-3344
Ethan R. Okura received his doctor of jurisprudence degree from Columbia University in 2002. He specializes in estate planning to protect assets from nursing home costs, probate, estate taxes and creditors.
This column is for general information only. The facts of your case may change the advice given. Do not rely on the information in this column without consulting an estate planning specialist.