5 U.S. Estate Tax Surprises For Nonresident Alien Investors

Forbes

03-06-2025

Foreign investors can win big with United States investments. While holding U.S. assets can be lucrative, the U.S. estate tax regime is complex and often misunderstood by nonresident alien investors. NRAs, those who are neither U.S. citizens nor residents for estate tax purposes, are often very surprised when they learn of the challenges imposed by the estate tax rules. This article summarizes 5 estate tax surprises that often catch the NRA investor off-guard. These include the limited exemption amount, common misconceptions about asset types, the requirement to disclose the value of worldwide assets on the NRA's estate tax return, and other pitfalls that can complicate estate planning.
One of the biggest surprises for NRA estates is the paltry $60,000 exemption amount for U.S. situs assets subject to estate tax. U.S. citizens and residents are taxed on the value of their assets owned worldwide, but they benefit from a very generous $13.61 million federal estate tax exemption (as of 2025), and under the Trump Administration, this may rise to an inflation-indexed $15 million in 2026.
NRAs are limited to a mere $60,000 exemption for U.S. situs assets. This means that if the total value of an NRA's U.S. situs assets exceeds $60,000 at the time of death, the excess is subject to U.S. estate tax at rates ranging from 18% to 40% based on a progressive table, with amounts exceeding $1 million taxed at the 40% rate.
Wealthy foreign investors typically hold significant U.S. assets such as real estate, stocks, or business interests. For them, the low exemption amount can result in substantial estate tax liability that could have been mitigated with proper advance planning and structuring. The harsh effect of the estate tax can be seen for example, by an NRA with $1.5 million in non-exempt U.S. situs assets. Assuming no treaty applied to reduce the tax and no deductions are taken, the estimated U.S. estate tax would be a punishing $532,800 (a tax hit that is over 35% of the U.S. investments, significantly eroding their value).
A very common source of confusion arises when identifying which assets are subject to, or exempt from, U.S. estate tax. Many NRAs mistakenly believe that cash-related holdings are exempt from the estate tax. They do not appreciate the subtle but highly important nuances. For example, bank deposits in a U.S. bank are generally not considered U.S. situs assets due to special rules. They are thus exempt from U.S. estate tax, provided they are not connected to a U.S. trade or business. Typically, this exemption applies to cash held in checking or savings accounts, certificates of deposit, or similar instruments.
Many NRAs mistakenly assume this exception applies to cash held in a U.S. brokerage account but are shocked to learn that this cash is treated differently. It is considered a U.S. situs asset subject to the estate tax. Estates of foreign uninformed investors will be faced with a surprise estate tax bill since the tax law's distinction transforms what seems like a 'safe' cash holding into a taxable asset.
The U.S. estate tax treatment of U.S. stocks, U.S. mutual funds, U.S. ETFs, and similarly structured U.S. vehicles is clear. These are U.S. situs assets subject to estate tax, regardless of where they are held. It will not be a shield from U.S. estate tax simply because the assets are held in a foreign brokerage account, or in the name of a nominee. Furthermore, the custodian will usually not release the assets to heirs without receiving what is called a Federal Transfer Certificate or other proof that U.S. estate tax has been fully paid. It can sometimes take well over a year for the NRA's U.S. estate tax return on Form 706-NA to be filed, tax paid and the matter to be fully resolved with the IRS.
This rule can and does, trap NRAs who hold substantial U.S. investment portfolios of through international accounts. Too many foreign investors are unaware of this exposure until it's too late. This is why advance planning should be undertaken. For example, use of a properly formed estate tax 'blocker' is often a simple and beneficial solution.
Perhaps one of the most jarring surprises for NRA estates is the requirement to disclose the value of the decedent's worldwide assets when filing the U.S. estate tax return. Only the assets treated as located within the U.S. are subject to the estate tax, but the IRS requires a complete picture of the decedent's global estate to determine the computation of the tax. This requirement is often viewed as very intrusive and if more investors were aware of it, they might reconsider U.S. investments or at least, implement ownership structures to avoid the estate tax.
The disclosure of worldwide asset value is required for the IRS to determine whether certain deductions and treaty-based benefits may apply and specifically to calculate the amount of allowable deductions under a special proportional deduction rule. If the estate wants to benefit from these, the disclosure must be made. Although the worldwide disclosure is technically required only if the estate claims deductions or treaty benefits, omitting the information can possibly cause the return to be treated as incomplete. This can jeopardize the estate's ability to claim any of these benefits at a later time, for example, on audit. As such, full disclosure of the value of the decedent's worldwide asset value is generally the safest course.
Sophisticated investors often use blocker structures, for example, holding U.S. assets through a foreign corporation. This permits the investor to avoid U.S. estate tax entirely. At death, the decedent owns shares in a non-U.S. corporation. Since shares of a foreign corporation are generally not U.S.-situs property, they are not subject to U.S. estate tax.
By holding the U.S. assets indirectly through such entities, NRA investors can avoid both the estate tax on death and the intrusive requirement to disclose worldwide assets. Such strategies are commonly used by high-net-worth individuals who want to tap the U.S. market but wish to avoid triggering the U.S. estate tax regime.
Think you're good because of a treaty? Think again!
Another unwelcome surprise for the foreign estate lies in the limited scope of estate tax treaties. It is true that the U.S. has estate tax treaties with certain countries to mitigate double taxation, but too often they provide less relief than expected, and as discussed, claiming treaty relief means significant disclosure about the value of worldwide wealth.
Some treaties allow for a prorated exemption based on the ratio of U.S. situs assets to worldwide assets. For high-net-worth taxpayers, this may not significantly reduce the U.S. estate tax burden.
Complications also when the decedent's home country also imposes estate or inheritance taxes on the assets. Quite often there is a mismatch and the lack of coordination between the two tax systems can lead to double taxation, unless specific treaty provisions apply. The foreign estate may be surprised to find that the home country's tax authorities and the IRS both claim a share of the estate.
Careful planning is needed when foreign laws and U.S. laws overlap and sometimes collide. Many possibilities exist, including ownership structures and certain investments, but taxpayers must be proactive in learning and implementing the plan beforehand.
For example, one lesser known but welcome surprise is the treatment of life insurance proceeds paid out on an NRA's life. Even if paid by a U.S. insurer, these proceeds are typically exempt from U.S. estate tax. The use of such insurance can provide a robust planning tool for NRAs with significant U.S. assets since the life insurance can provide liquidity to cover the U.S. estate tax without itself being taxable. Get the proper advice so that efficient planning strategies are not overlooked!
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