How Does Estate Tax Work with Foreign Assets?

Posted on by Tax Partners
31
Jan

What Is US Estate Tax?

The US estate tax is a federal tax on the transfer of an individual’s assets upon their death. For US citizens, Green Card holders, and tax residents, the IRS taxes their worldwide estate, meaning both US and foreign assets are included in the taxable estate.

This means that if you are a US citizen living abroad, or if you own property or investments outside the United States, these foreign assets are still subject to US estate tax.

 

How Does the IRS Determine Estate Tax Residency?

The IRS determines estate tax residency based on domicile, not just citizenship or physical presence.

  • Domicile means the place where a person intends to remain permanently or return to.
  • Even if a US expat has lived abroad for years, if they maintain strong ties to the US, they may still be considered domiciled in the US for estate tax purposes.

For non-residents (foreigners who do not have US domicile), only US-situated assets are subject to US estate tax.

 

Which Foreign Assets Are Subject to US Estate Tax?

For US citizens and residents, the IRS includes all worldwide assets in their taxable estate. 

These include:

  • Foreign real estate (homes, rental properties, land)
  • Overseas bank accounts
  • Foreign stocks and bonds (even if held in a foreign brokerage)
  • Business interests in foreign companies
  • Foreign pensions and retirement accounts
  • Jewelry, art, and other tangible assets located outside the US

For non-residents (NRAs), only US-situated assets are subject to estate tax. This includes real estate, shares in US corporations, and US-based accounts.

 

How Are Foreign Assets Valued for US Estate Tax?

Foreign assets are valued based on their fair market value at the time of death.

  • The fair market value (FMV) is the price at which an asset would sell between a willing buyer and seller, both knowledgeable and without pressure.
  • The valuation must be in US dollars using the exchange rate on the date of death.

Because of fluctuations in real estate and foreign stock values, professional appraisals may be necessary to determine an asset’s fair market value.

 

Estate Tax Exemption Limits for 2024

The US estate tax exemption allows estates valued below a certain threshold to avoid federal estate tax.

  • For 2024, the exemption amount is $13,610,000 per person.
  • Married couples can use portability rules to double the exemption to $27,220,000.

If an estate exceeds the exemption, the excess is taxed at a flat 40% federal estate tax rate.

For non-residents (NRAs), the exemption is only $60,000 for US-situated assets.

 

IRS Forms for Reporting Foreign Assets in an Estate

For estate tax reporting, US citizens and Green Card holders may need to file:

  1. Form 706 – US Estate Tax Return for citizens and residents.
  2. Form 706-NA – Estate Tax Return for non-resident aliens (NRAs), reporting only US-based assets.
  3. Form 8938 – Required for estates with foreign financial assets exceeding the reporting threshold.
  4. Form 3520 – Used if the deceased had transactions with foreign trusts or received significant gifts from foreign persons.

Deadline: The estate tax return must be filed within 9 months after the date of death. However, a six-month extension is available upon request.

 

Foreign Trusts & Entities in Estate Taxation

If a US citizen or resident holds interest in a foreign trust, foundation, or corporation, that interest is included in their taxable estate.

  • Foreign trusts may not provide estate tax protection if the individual had significant control over the assets.
  • Business ownership in foreign entities must be properly valued and included in estate filings.

This area of taxation is highly complex—seeking professional tax guidance is recommended.

 

Reporting Requirements for Inheritance or Gifts from Foreign Persons

If a US citizen or resident receives an inheritance from a foreign person, they must comply with IRS reporting rules.

  1. Form 3520 – Required if the inheritance or gift exceeds $100,000 in a calendar year.
  2. Foreign Corporate/Partnership Gifts – If a gift is received from a foreign business, reporting is required if the total value exceeds $18,567 in 2023 (adjusted annually for inflation).

Failure to file Form 3520 can result in penalties of up to 25% of the foreign inheritance received.

 

Strategies to Minimize US Estate Tax on Foreign Assets

For high-net-worth individuals and US expats with foreign assets, careful estate planning can reduce or eliminate US estate tax liabilities.

1. Utilizing the Estate Tax Exemption & Credits

  • Ensure full use of the $13.61 million exemption per person.
  • Claim foreign tax credits for estate taxes paid in another country to prevent double taxation.

2. Proper Ownership Structuring

  • Holding foreign real estate in a non-US entity may shield it from US estate tax.
  • Using joint ownership with non-US spouses may reduce estate tax liability.

3. Lifetime Gifting Strategy

  • Gifting foreign assets while alive reduces the size of the taxable estate.
  • The annual gift tax exclusion in 2024 is $18,000 per recipient.
  • Unlimited gifting is allowed between US citizen spouses.

4. Use of Trusts

  • Irrevocable life insurance trusts (ILITs) can remove life insurance proceeds from an estate.
  • Foreign grantor trusts can protect non-US situs assets from US estate tax.

Each of these strategies requires careful implementation to ensure compliance with both US and foreign tax laws.

 

Final Thoughts

US estate tax applies to worldwide assets for US citizens, Green Card holders, and residents, including foreign real estate, bank accounts, and business interests.

  • For 2024, the estate tax exemption is $13.61 million per person.
  • Foreign trusts and businesses are often included in taxable estates.
  • Gifting, trust planning, and tax credits can help reduce estate tax liability.

Given the complexities involved, proper tax planning is essential. If you need help structuring your estate or ensuring compliance, Tax Partners can guide you through every step.

 

This article is written for educational purposes.

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at info@taxpartners.ca, or by visiting our website at www.taxpartners.ca.

Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.