US Estate Tax on US foreign trusts

US estate tax on US trusts set up as foreign trusts

1. IRS website on Deceased nonresidents who were not American citizens are subject to U.S. estate taxation with respect to their U.S.-situated assets. A nonresident’s stock holdings in American companies are subject to estate taxation even though the nonresident held the certificates abroad or registered the certificates in the name of a nominee.

Exceptions: Assets that are exempt from U.S. estate tax include securities that generate portfolio interest, bank accounts not used in connection with a trade or business in the U.S., and insurance proceeds.

Executors for nonresidents must file an estate tax return, Form 706NA, United States Estate (and Generation-Skipping) Tax Return, Estate of a nonresident not a citizen of the United States, if the fair market value at death of the decedent's U.S.-situated assets exceeds $60,000.
2. Using LLCs to hold US accounts is now reportable to the IRS for AEoI purposes. So advisors are recommending US trusts as a CRS loophole in FINCENs regulations on identifying Beneficial Owners.. And one can establish trust to not be a US trust for tax purposes by appointing foreign protector or giving powers to foreign settlor. Except now the settlor will be subject to 40% tax with no threshold exemption. Terrible CRS solution butr advisors keeping mum on this trap... The foreign status of the trust for U.S. estate tax purposes will not protect the settlor of the trust from U.S. estate taxation if:
  1. the settlor is either a beneficiary of the trust or can revoke or amend trust, and
  2. the trust owns assets present or deemed to be present in the United States.
3. "Estate tax US situs assets" states clearly that a US trust qualifying as a foreign grantor trust (e.g. foreign protector or settlor has powers) then the trust's US situs assets will be liable for estate tax at 40% with only a $60,000 de minimus. (as opposed to $5.3 million for US resident). US situs assets include US stocks, funds, etc. Contrary to often tax advise, a trust holding assets via an underlying foreign corporation is no use either... unless the company does real business and is managed arm's-length. Because stock of a foreign corporation is not subject to U.S. estate tax,holding U.S. situs assets through a foreign corporation constitutes a planning opportunity. To the extent the foreign corporation does not engage in legitimate business activities or operate in an arm’s-length fashion, however, there is a risk thatit will not be respected as an effective shield from US. estate tax. Other foreign entities may not be considered the equivalent of a corporation but may instead be treated as atrust that is looked through for purposes of determining whether the decedent died owning U.S. situs assets.

Foreign Investors Learn Why a Foreign Corporation is U.S. Death Tax Trap. US advisors often recommend the non-resident alien to own their U.S. investments and U.S. real estate through a foreign corporation (such as a Panamanian company or a British Virgin Island company). Since the 1950’s, this tax plan has failed. The U.S. courts have ruled for the IRS. These court cases focused on the power to revoke (section 2038) and the right to the corporate dividends (section 2036). These tax laws required the assets owned by the foreign entity to be included in the deceased’s U.S. taxable estate.

Today’s tax planners are using foreign corporations or Stiftungs with the mistaken belief that the foreign entity prevents U.S. estate taxes. Well, they do not.

4. ...shares of stock issued by a corporation constitute as intangible property. If the corporation is a U.S. corporation, then the stock has a U.S. situs, and if it is owned by the NRA at the time of his death, then it will be subject to federal estate taxation regardless of where the stock certificate or other physical evidence of ownership is located. A partnership interest and a membership interest in a LLC are also intangible personal property under U.S. laws, but the application of the federal estate tax is not as clear as in the case of a corporation. Generally speaking, however, if the partnership or LLC does not terminate upon the NRA’s death, and is also a valid and continuing entity, then the situs of its underlying assets at the NRA’s death would not be relevant, but the U.S. may seek to assert an estate tax based on either the place where the entity’s business is conducted or the domicile of the NRA partner. Therefore, the NRA should be cognizant of the potential estate tax exposure when investing in partnerships and LLCs.
5. See slides 16, 17, 18