The Tax Cuts and Jobs Act made estate tax changes for U.S. citizens and domicilaries, such as increasing the unified estate and gift tax exemption from $5.6 million to $11.2 million. However, for non-U.S. citizens or domicilaries (“foreigners”), there was not much help.
The $60,000 estate tax exemption for foreigners remains unchanged. Furthermore, the $60,000 exemption only applies to the estate tax, there is no lifetime gift tax exemption for foreigners other than the $15,000 annual exclusion per done. As always, some estate and gift tax treaties provide foreigners a prorated unified estate tax credit based on the ratio of U.S. situs assets to worldwide assets. Therefore, the increased unified estate and gift tax exemption could provide benefit in this situation. Although, there is a very limited number of estate and gift tax treaties as compared to the extensive network of income tax treaties.
Another possible benefit for foreigners is the decrease of the corporate tax rate from 35% to 21%. This can potentially open new planning opportunities or reduce the tax consequences of blocker corporations or other common structures. In many cases, foreigners have used U.S. corporations to invest in the U.S. market for reasons other than tax, and now these situations will be more tax favorable than before.
The result of these changes, or lack of, is that it remains extremely important for foreigners to have proper planning for investing in the U.S. and U.S. estate and gift taxes. First, with the lower corporate tax rate there may be options for planning that are not as tax unfavorable as before. Also, without any changes in the exemption for foreigners, the estate tax on U.S. property can be prohibitive. For example, a foreigner giving U.S. property to a foreign beneficiary through a will, absent any treaty or proper planning, would only get a $60,000 exemption and then would pay tax up to 40% on the full fair market value of the property. This can be a very difficult financial situation to pay nearly half the value of property simply to pass it to heirs. Additionally, if the property is in California there could be probate fees as well. Overall, some basic estate tax planning can not only mitigate these disastrous tax consequences but can also give someone peace of mind.