706-NA: US Estate Tax on Foreigners

Navigating the complexities of the U.S. estate and gift tax as a non-resident, known as a “non-domiciliary,” can be daunting. With the Internal Revenue Code’s different applications of the term “U.S. person” for income and estate tax purposes, understanding whether the estate tax will apply can cause many individuals who are not familiar with U.S. tax law can be confusing.

When it comes to the estate tax, the IRS’s focus is on the taxable estate. For non-domiciliaries, this encompasses a range of assets with the principal purpose of targeting U.S.-situated assets. From tangible assets like U.S. real property to intangible assets such as certain business interests, property situated within the U.S. and held by a non-domiciliary can be subject to taxation upon the decedent’s death. This is a significant difference from the estate tax on U.S. citizen or domiciliary, which is on all worldwide assets held by the decedent at the time of their death, rather than those assets within the U.S.

The second critical distinction between U.S. citizens/domiciliaries and non-domiciliaries for purposes of the estate tax are the exemption amounts. Both U.S. citizens/domiciliaries and non-domiciliaries receive a lifetime exemption on the transfer of assets, however, the exemption amount differs significantly between the two. To overcome the assessment of tax on all worldwide assets, U.S. U.S. citizens/domiciliaries receive a lifetime exemption of $13.61 million, which will revert to $6.8 million in 2026. However, because non-domiciliaries are taxed only on the transfer of assets with U.S. situs, the transfer of assets is only tax-free up to the first $60,000. However, with careful planning, non-domiciliaries can limit their exposure to U.S. tax.

Non-domiciliaries subject to the estate tax must ensure timely compliance with their tax reporting and payment obligations lest they be subject to costly penalties. To avoid this exposure, the executor of a non-domiciliary estate must file Form 706-NA within nine months of the decedent’s death. Form 706-NA provides a comprehensive overview of the decedent’s estate and its U.S. situated assets. Careful planning can assist not only in limiting exposure to the U.S. estate tax but can also assist the estate avoid penalties by making filing Form 706-NA easier. Additionally, many financial institutions are now requiring to see the Form 706-NA before they will change ownership or title on any assets or investments.

Navigating U.S. estate tax implications as a foreigner (non-domiciliary) requires careful consideration of taxable assets, exemption thresholds, and regulatory requirements. With careful planning, staying informed, and using the assistance of trusted professional expertise, foreigners can effectively manage and plan their U.S. estate tax exposure and ensure the seamless transfer of wealth to future generations. If you believe that you may have assets subject to the estate tax and want to plan your vulnerability to the estate tax, contact the trusted attorneys at Hone Maxwell LLP.

Disclaimer: Hone Maxwell LLP articles and blogs are not intended as legal advice. Additional facts, facts specific to your situation or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information herein.

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