Limited exemption
Currently, an estate tax charge should not arise for an NDA if the taxable US estate’s net value does not exceed US$60,000. Any liability is calculated by reference to the net value of the US situs estate, and deductions are available for liabilities directly allocable to US assets, such as a non-recourse debt on US real estate. Even so, the US$60,000 exemption is fairly trivial, particularly compared to the current gift and estate tax exemption available for US citizens and domiciled individuals of US$12.92mn.
A limited deduction is also available for more general estate expenses, but these are allocable based on the value of the US estate as a proportion of the worldwide one. An unlimited marital deduction against the net US assets, meanwhile, is available only if the surviving spouse receiving the assets is a US citizen.
It is a common misconception that assets passing to a surviving spouse will automatically qualify for relief. This can cause timing issues where the local country estate tax planning is relying on tax deferral. If a marital deduction is not automatically available, it can be gained using certain US domestic trust arrangements. This would serve only to defer the US estate tax liability rather than reduce it, however.
The US also has a limited network of estate tax treaties with other countries, including the UK and Ireland. Specific treaties may limit overall exposure to US estate tax, but this will depend on the particular circumstances of the deceased’s situation, including their domicile status.
Utilising treaty reliefs, again, requires careful planning.
Given limited exemptions, the best way to avoid exposure to US estate tax may be to ensure that the individual is not considered to own the US assets. This can be achieved using corporate entities, partnerships or appropriately structured trusts. The structuring must be carefully planned to ensure it is effective, however. It will need to take account of the tax implications in any other relevant jurisdictions and the costs of implementation and continued maintenance.
It should be noted that a nominee arrangement may be put in place by a custodian for logistical ease. This will not be enough to avoid US estate tax, though, as the asset's ultimate beneficial owner remains the individual. Similarly, holding US shares in a non-US brokerage account will not offer any estate tax protection.
Greater information flow to the IRS through Foreign Account Tax Compliance Act (FATCA) and related Form W-8 reporting ensures accurate identification of US asset ownership. This will require updating when there is a change in ownership for any reason.
