Nonresidents with U.S. Real Estate, IRS Inheritance & Estate Tax

Nonresidents with U.S. Real Estate, IRS Inheritance & Estate Tax

Deceased Foreigners Estates with U.S. Assets 

Unfortunately, the U.S. tax rules reach far and wide, and oftentimes unsuspected taxpayers abroad are surprised at how the U.S. taxes non-resident aliens and other foreign person estates who have U.S. assets. One of the most complicated aspects of being a foreigner is when the foreigner has U.S. assets as part of their estate. Complicating the matter further is that when that foreigner passes away and the foreign Estate administrator/Executor seeks to administrate the estate, the U.S. government can make it difficult for the estate to close the estate – due to the additional estate tax implications of foreign persons with U.S. assets. Let’s look at some of the basics of how the beneficiaries of deceased foreigners with U.S.-based assets may have estate tax implications.

NRNC (Foreigner vs U.S. Person for Estate Tax)

First, it is important to distinguish between foreigners and taxpayers who are considered U.S. persons for estate tax purposes (which is different than being a U.S. person for income tax purposes). When a person is an NRA, then typically the United States can only assess tax against their U.S.-based assets and not foreign assets. Conversely, if it is a US person for example who may reside overseas as an expat — then even though they live overseas — they may still be considered a U.S, person for estate tax purposes and have their entire U.S. and foreign estate subject to U.S. estate tax (although they get the benefit of ~$13M exemption).

In other words, whether or not the U.S. will tax the U.S. estate or the entire estate depends on whether the decedent qualifies as a:

• • • U.S citizen

    • U.S. Resident living abroad, or

    • a Non-Resident Alien

As provided by the IRS:

• • • “Nonresident not a citizen (NRNC) of the United States. For estate tax purposes, a decedent is an NRNC of the United States if the decedent is neither domiciled in nor a citizen of the United States at the time of death. A decedent who acquired U.S. citizenship solely by reason of being a citizen of a U.S. territory or by reason of birth or residence within a U.S. territory is not treated as a U.S. citizen.”

$60,000 Exemption

One of the biggest headaches about being a foreigner NRNC who owns United States assets as part of their estate is that when the person passes away there is only a very small estate tax exemption. For example, when a person is a U.S. resident, they generally have close to $13 million in exemption. Thus, if their global estate is worth $11.5 million then there is generally no estate tax — subject to whether any gifts were given during lifetime and other exceptions. Conversely, for NRNCs, the exemption is only $60,000 and the estate tax becomes subject to a 40% estate tax — which means there can be a significant amount of estate tax for foreigners who have U.S. assets and in which there is no U.S./Foreign Country Estate Tax Treaty. 

Federal Transfer Certificate

Oftentimes, foreign taxpayer estates will request a federal transfer certificate because the property was not administered by an executor or administrator within the United States and the foreign executor requires proof of payment or discharge by the IRS.

The purpose of the transfer certificate is to show that any tax upon the estate by the United States has been fully taken care of. As provided by the IRS:

• • • To Request a Transfer Certificate for an Estate of a Nonresident not a Citizen of the United States

      • A transfer certificate will be issued by the Service when satisfied that the tax imposed upon the estate, if any, has been fully discharged or provided for. The tax will be considered fully discharged for purposes of the issuance of a transfer certificate when investigation has been completed and payment of the tax, including any deficiency finally determined, has been made.

      • To request a transfer certificate where the Form 706-NA was required to be filed, go to Part A, below.

      • To request a transfer certificate where the Form 706-NA was not required to be filed, go to Part B, below.

      • For 2010 dates of death, see IRS Notice 2011-66.

Decedent Foreign Asset Reporting or U.S. Tax Non-Compliance

Sometimes, it is not until after someone has passed away that the estate learns that the taxpayer may have had some foreign account reporting requirements that were missed — which could result in fines and penalties for the decedent and/or the estate. This could be because the taxpayer was previously a U.S. person for income tax purposes and/or may have been an NRNC but had certain US assets that qualified as a US person that owned foreign accounts, assets, or investments, that would have required reporting to the U.S. government on forms such as the FBAR and FATCA Form 8938.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.