U.S. Estate and Gift Taxes: A Guide for Non-Resident Aliens

by
Leo Wealth

For non-resident aliens (NRAs), owning assets with ties to the United States can introduce them to the complex regime of U.S. gift and estate tax.

Understanding the implications, exemptions, and strategic planning options available is essential for those managing or considering acquiring such assets.

In this article Eric Katz, Chief Wealth Management Officer at LEO Wealth, shares a clear and concise overview of the tax obligations and strategies for NRAs dealing with U.S. situs assets.

Who are Non-Resident Aliens?

Non-resident aliens (NRAs) are defined by the Internal Revenue Service (IRS).

The term ‘alien’ simply refers to any individual who is not a U.S. citizen or U.S. national.

The ‘non-resident’ element narrows this down to aliens who either do not possess a green card or do not meet the substantial presence test, a method employed by the IRS to determine tax residency.

The Substantial Presence Test

The test assesses an individual’s physical presence in the United States over a three-year period. To meet this test, an individual must be present in the U.S. for at least 31 days during the current year and 183 days over a three-year period that includes the current year and the two preceding years.

Days in the current year count in full, days in the first preceding year count as one-third, and days in the second preceding year count as one-sixth.

Meeting this test changes an NRA’s tax obligations to resemble those of a U.S. citizen or Green Card holder, notably income taxing their worldwide income.

What are U.S. Situs Assets?

U.S. situs assets are either tangible or intangible properties with a substantial connection to the United States.

Tangible assets are physically present items, such as real estate, artwork, jewelry and collectibles, as well as U.S. or foreign currency or cash within the U.S.

Intangible assets, on the other hand, include for example shares of both publicly traded and private U.S. companies, cash accounts held in U.S. brokerage firms, life insurance policies issued by U.S. entities, and other intangible property types used in conjunction with U.S. trade or a U.S.-based business.

While income tax obligations are generally recognized, the U.S. gift and estate tax implications for these assets can catch many NRAs by surprise.

Understanding these distinctions and preparing for their implications is essential for any NRA engaging with the U.S. financial system or real estate market.

Understanding the U.S. Gift Tax

The U.S. gift tax is particularly relevant for NRAs as it applies to the transfer of tangible U.S. situs assets during their lifetime.

The U.S. gift tax offers no exemption threshold for NRAs. Every dollar of the transferred tangible asset is subject to tax, with a significant rate of 40%.

For example, if an NRA gifts a U.S. tangible property valued at $100,000, a tax of $40,000 would be due, emphasizing the need for strategic planning before making such transfers.

The U.S. Estate Tax Explained

The U.S. estate tax, or inheritance tax, comes into play upon the death of a non-resident alien who owns U.S. assets. The estate tax applies to both tangible and intangible U.S. situs assets.

Contrary to the gift tax, the estate tax allows for an exemption on the first $60,000 of the estate’s value. Beyond this threshold, the remaining assets are taxed at the same rate of 40%.

The Risks of Overlooking Tax Obligations

We often meet NRAs that are unaware of their potential exposure to U.S. transfer taxes, in other words the gift tax and inheritance tax.

This misconception can lead to a significant financial surprise, as assets may be subject to gift and estate taxes depending on the nature of the asset transfer.

So, if not carefully managed, NRAs may find themselves subject to a gift or estate tax when their thought would have been a tax-free transfer.

The Role of Entities in U.S. Gift and Estate Tax Planning

There are solutions to structure and manage tax implications for NRAs.

U.S. LLC

One strategy involves the creation of a U.S. Limited Liability Company (LLC). An NRA can fund this LLC with offshore cash or U.S. situs intangibles, and then direct the LLC to purchase real estate or other tangible assets.

This move avoids a direct ownership of tangible U.S. assets into an indirect ownership via direct ownership of an intangible asset, the LLC.

When it comes to gifting, the NRA can then transfer interests in the LLC (intangible) rather than the real estate (tangible) itself. This should not trigger the gift tax as that only applies to tangible assets.

However, the LLC itself remains a U.S. situs asset for estate tax purposes upon the owner’s death, and the value of the LLC would be included in the estate tax calculation.

Foreign Corporations

To address the estate tax challenge, a foreign corporation presents a viable solution. For instance, establishing a Hong Kong Limited (HK Limited) owned by the NRA, which then owns the U.S. real estate, can transform the asset into a non-U.S. situs asset for estate tax purposes.

Upon the NRA’s death, shares of the foreign corporation do not fall under U.S. estate tax jurisdiction, offering a significant estate tax advantage.

However, this strategy requires careful consideration of other potential challenges, including how the U.S. treats foreign corporations under its income tax laws.

Other Entities

Beyond LLCs and foreign corporations, a variety of entities such as trusts, partnerships, and additional corporate structures can serve to mitigate these transfer taxes.

These entities, especially when established outside the U.S., can play a dual role: facilitating gift transfers without incurring U.S. gift tax and reducing estate tax exposure by transforming U.S. situs assets into non-U.S. situs ones.

This flexibility highlights the importance of tailored strategies that consider the unique circumstances of each NRA.

Potential implications of the Corporate Transparency Act

The proposed Corporate Transparency Act (CTA) may impact both U.S. and non-U.S. people.

The CTA aims to enhance transparency by requiring the disclosure of beneficial ownership information for entities registered under state law.

Although currently on hold due to constitutional challenges, its potential enactment could impose new disclosure requirements on both U.S. and non-U.S. persons.

Considering Purchasing U.S. Situs Assets as an NRA?

If you are considering purchasing U.S. situs assets in a significant amount, it is strongly recommended to talk to a tax law expert. Real estate attorneys or financial advisors may not be well-versed to counsel non-resident aliens regarding their tax implications.

We advise you to “consult first, purchase later.” Jumping into asset acquisition without a clear understanding of the tax implications and structuring options can lead to a predicament that is both complex and potentially costly to unwind.

Owning U.S. Situs Assets Already?

Here, the distinction between tangible and intangible assets comes into play.

Intangible assets can be transferred while alive (gifting) into a fitting solution, to take it of your estate without triggering U.S. gift tax.

However, for tangible assets, the options for mitigating U.S. estate tax for non-resident aliens post-acquisition are limited and often less effective.

In cases where a tangible asset has appreciated modestly, strategic restructuring, such as transferring the asset to a previously established entity, might offer a feasible solution to mitigate potential estate taxes while managing income tax on appreciation effectively.

LEO Wealth Tax Planning Solutions

Investing in or owning U.S. situs assets as a non-resident alien may lead to complex tax implications, especially concerning gift and estate taxes. The potential 40% tax rate on these transfers can significantly impact the financial planning of non-resident aliens.

Engaging with a tax expert becomes not just advisable but essential, preferably at the earliest contemplation stage of acquiring U.S. assets.

Whether you’re an NRA contemplating the purchase of a U.S. asset or seeking to manage existing U.S. situs assets efficiently, expert guidance can ensure that your investment decisions are both strategic and compliant.

At LEO Wealth, we can support you with strategic tax planning and preparation, estate planning, investment management and more. Get in touch with us here or by email at info@leowealth.com.


DISCLOSURES

Tax and Legal services provided are separate from the Securities or Advisory services offered through LEO Tax and Consulting LLC. Please consult the appropriate professional regarding your individual circumstance.

This article provides general information and discussion about the topic material.  The general information provided in this article is not intended and should not be construed as tax or legal advice. If the reader or any other person has an tax or legal concerns, he or she should consult with an appropriately licensed attorney or accountant.

Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter.  Please contact us if you wish to have formal written advice on this matter.

Latest Insights

Expert and Personal Financial Guidance

We offer a personal, calculated plan for your finances. Get in touch to learn how we can help support your family’s future and build a richer life.

Expert and Personal Financial Guidance

We offer a personal, calculated plan for your finances. Get in touch to learn how we can help support your family’s future and build a richer life.

Processing...
Thank you! Your subscription has been confirmed. You'll hear from us soon.
ErrorHere