Most people – whether they need it or not – ask us about minimizing estate taxes. 

Estate tax for US resident: Estate tax is the taxation of property held by an individual at the time of their death.  Estate tax is not always owed, instead it is only imposed if an individual has assets over the current estate tax exemption rates at their death.  In 2024, the federal state tax exemption is approximately $13.6 million dollars per person who is a US citizen (it is scheduled to decline to approximately $7MM in 2026 – but that is still comfortable enough for the vast majority of people). In NY, estate tax also starts after $7MM. While there are many individuals who pass away owing no tax at all with these exemptions, these figures are relevant to those high-net-worth individuals who should be working with experienced estate and tax planning attorneys to minimize taxes owed. 

Estate tax for non-US residents: But what about foreigners (non-green card holders, non-residents) who own property (real estate, bank accounts, brokerage accounts, etc.) in the United States? Do these individuals receive the same exemption rates? Some people are shocked to learn the answer is no.   The exemption rate for U.S. assets owned by foreigners is only $60,000.  This is a monumental difference when compared to the $13.6 million federal exemption U.S. citizens and domiciliary receive.  This can have disastrous impacts on the family, or friends set to inherit a foreigner’s U.S. based assets as the tax imposed can be up to 40%. So if a Spanish citizen owns an apartment in Manhattan worth $2MM, upon his death, his children may need to pay estate taxes of $800K. Immediately.  

The types of assets subject to this estate tax can include real estate located in the United States, tangible personal property and stock of corporations organized in or under United States law.

How to minimize this tax: There are some ways for non-residents to minimize the taxes owed, such as owning the assets through a foreign operated corporation, converting the asset which is taxable to a non-taxable one, purchasing a life insurance policy that will pay the estate taxes, etc.  In addition, some countries have treaties with the U.S. which may help to minimize taxes owed.  If you want to learn more about U.S. estate taxes imposed on foreigners, take a look here.

Marriage by a US citizen to a non-citizen: Another tax trap can arise where a U.S. citizen has a noncitizen spouse.  Normally spouses can transfer unlimited assets between themselves without triggering estate or gift taxes.  In addition, some tax planning strategies such as the marital deduction, which is used to increase tax exemptions, cannot be utilized when an individual is married to a noncitizen.

In this type of situation, there are various options, assets can be transferred into a specific type of qualified domestic trust for the benefit of the noncitizen spouse.  In addition, the U.S. citizen spouse can take advantage of the annual exclusion for gifts to a noncitizen spouse, which in 2024 is currently $185,000.

Given the high costs and risk related to estate taxes for foreigners and noncitizen spouses, it is imperative that anyone owning property in the U.S. but residing in a foreign country as well as married couples with one noncitizen spouse work with an experienced tax planning attorney to implement strategies to save them from the above-mentioned tax traps.

If you have any questions please reach out to us on 212-709-8112 or ksverdlov@sverdlovlaw.com or book a consultation here: https://calendly.com/katyasverdlov