Navigating U.S. Estate Taxes for International Investors

The U.S. stock market, particularly its high-performing tech sector, consistently attracts international investors seeking growth and stability.

However, for non-U.S. citizens or residents, investing in U.S. assets comes with a significant consideration—U.S. estate taxes.

Without a clear understanding and careful planning, investors may face a substantial tax burden on their estates, impacting their families’ long-term financial security.

This post outlines the essentials of U.S. estate taxes for Non-Resident Aliens (NRAs) and provides strategies to mitigate potential tax liabilities.

Let’s explore these concepts through Alex’s story, a seasoned expat professional, who faced similar concerns.

Do Non-U.S. Citizens Pay Estate Taxes?

Yes, if you are a “Non-Resident Alien” with U.S.-based assets* over $60,000, you may be subject to U.S. estate taxes of up to 40%.

* U.S.-based assets include:

Real Estate
U.S.-listed investment funds and ETFs
Stocks of U.S. Based Corporations (e.g. P&G, Microsoft, Nvidia)

Understanding US Estate Tax for Non-Residents

In the U.S. tax system, a Non-Resident Alien (NRA) is anyone who is not a U.S. citizen, does not hold a green card, and does not meet the “substantial presence” test, which requires a person to spend a certain amount of time in the U.S. annually.

For NRAs, certain types of U.S.-based investments may be subject to U.S. estate tax, regardless of where the investor lives or where the assets are held.

Case Study: Meet Alex

Alex is 52 and has spent the last two decades working on expat assignments for Procter & Gamble (P&G).

He is currently based in Poland and has accumulated $1.2 million in P&G stock through various incentive programs over the course of his career.

Although Alex has no direct connection to the U.S., he is concerned that U.S. estate taxes might significantly reduce any legacy he would want to leave to his wife and two children.

Seeking to protect his family’s inheritance, he decides to explore solutions that could help avoid U.S. estate tax exposure while still benefiting from international stock market growth.

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U.S. Estate Tax Thresholds: A Huge Difference for NRAs

For U.S. citizens and permanent residents, the estate tax exemption is generous—currently around $12.92 million per person.

This threshold, however, is drastically reduced for NRAs, who are only granted a $60,000 exemption on U.S.-based assets.

The consequence is significant: NRAs with U.S. assets valued above this threshold face estate tax rates as high as 40% on amounts exceeding $60,000.

For Alex, as an expat working for P&G in Poland, planning for U.S. estate taxes is crucial to preserving his assets for his family.

His $1.2 million in employer stock exceeds the $60,000 threshold by a wide margin, meaning his estate would be liable for tax on $1.14 million.

Recognising the impact this could have on his family, Alex decides to take action.

Which Assets Are Subject to U.S. Estate Tax?

The IRS considers certain types of U.S.-based assets as “U.S. situs assets,” which are taxable for NRAs. These include:

Real Estate in the U.S.
U.S.-listed investment funds and ETFs
Stocks of U.S.-Based Corporations – U.S. corporate stocks are subject to estate tax, regardless of where they are held

How do U.S. Estate Taxes Work for Expats?

Many expat NRAs, like Alex initially, assume that holding U.S. stocks in a foreign account—such as in Switzerland or Singapore—offers protection from U.S. estate taxes.

However, for the IRS, it’s the nature of the assets that matters, not the location of the account.

As Alex learned, his P&G shares are still considered U.S. situs assets and subject to U.S. estate tax.

Mitigating U.S. Estate Tax Exposure: Alex’s Solution

After consulting with a cross-border financial adviser, Alex decides to sell down his P&G stock and reinvest the proceeds in non-U.S. pooled funds, specifically mutual funds and ETFs domiciled in Ireland or Luxembourg.

This approach allows him to retain equity market exposure and international diversification while removing his assets from the U.S. tax net.

Here’s how Alex implemented his strategy:

Sell Down U.S. Holdings
Alex arranged to gradually sell his P&G stock, minimizing the impact of market fluctuations and potential tax obligations.

By phasing his sales, Alex was able to monitor the market and capitalize on favourable conditions while maintaining flexibility.

Reinvest in Non-U.S. Pooled Funds
Working with his adviser, Alex identified a range of ETFs and mutual funds based in Ireland and Luxembourg.

These funds provided access to similar market sectors, including consumer goods, but without the U.S. situs designation, effectively shielding his assets from U.S. estate taxes.

Review Local and International Tax Implications
Alex also worked with a tax adviser to review applicable tax treaties and local tax obligations to ensure compliance and to consider any tax benefits available.
Establish a Succession Plan
Finally, Alex updated his estate plan, ensuring his assets were structured in a tax-efficient way for transfer to his heirs.

This included clarifying the roles of executors and beneficiaries to prevent unnecessary legal and financial complications in the future.

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Additional Strategies to Consider

For international investors in situations similar to Alex’s, there are additional approaches to mitigate U.S. estate tax exposure:

1. Offshore Bonds or Trusts

By holding U.S. assets through an offshore bond or trust, investors create a legal separation between themselves and the U.S. assets.

A properly structured offshore bond or trust can potentially shield U.S. holdings from estate taxes.

2. Life Insurance for Estate Tax Coverage

Life insurance is another option for covering potential estate tax liabilities.

For Alex, who wanted to protect his family from any unforeseen tax exposure, a life insurance policy could ensure that his heirs received the full value of his assets.

Life insurance proceeds are typically not subject to U.S. estate tax, making this a straightforward solution for families concerned about estate liabilities.

The Role of U.S. Tax Treaties

The U.S. maintains estate tax treaties with several countries, which may provide relief by either exempting certain assets or increasing the estate tax exemption for NRAs in those treaty countries.

Countries that the United States has estate tax treaties with at the time of writing:

Australia
Finland
Ireland
Austria
France
Italy
South Africa
Canada
Germany
Japan
Switzerland
Denmark
Greece
The Netherlands
United Kingdom

Key Takeaways for International Investors

For NRAs, the U.S. estate tax on U.S. assets can create a significant and often unexpected liability.

By adopting strategies like Alex’s, investors can shield their estates from this tax burden and ensure their families’ financial security.

Ultimately, each investor’s strategy will depend on personal circumstances and goals, but by working with an adviser who understands cross-border estate planning, international investors like Alex can align their wealth strategies with long-term peace of mind.

Contact me today, to discuss your unique situation.