Estate taxes and foreign nationals: ignorance is no excuse

By Jeff Reed

Kestler Financial Group


It would seem on the surface that foreign nationals holding U.S. assets would be subject to U.S. estate taxes on the assets held in the U.S., right? Well, sort of. While they are subject to U.S. tax laws regarding transfer taxes, the actual laws are very different from those for a U.S. resident.

We all know that ignorance is no excuse. Yet despite that fact, some still try to bury their heads in the sand about some of the planning pitfalls we face.

Case in point: foreign nationals. It would seem on the surface that foreign nationals holding U.S. assets would be subject to U.S. estate taxes on the assets held in the U.S., right? Well, sort of. While they are subject to U.S. tax laws regarding transfer taxes, the actual laws are very different from those for a U.S. resident.

How different? An estate tax exclusion amount of $60,000 versus $5 million.

That's not a typo. That is a problem waiting to happen. Admittedly, this is a rather unique niche, but if the recent statistic quoted by Lincoln Benefit is any indication, there is $82 billion of real estate in the U.S. held by international buyers. The need for U.S. insurance in rather significant amounts is very real, and has the distinct advantage of very clear laws rather than some sunset provision and potential reform clouding the issue.

In other words, the "wait and see" approach that your U.S. clients are using as an excuse to do nothing does not apply here.

Need more ammunition? Try this one: The taxes may be due at both the first and the second death! No unlimited marital deduction for these folks.

With $82 billion held by international buyers, the need for insurance is staggering ($28 billion?!) and, my guess would be, largely unfunded.

Admittedly, as great as all of this sounds from a "need" perspective, this type of business presents unique challenges. At a minimum, competent tax and legal advisors well versed in these issues need to be involved. Our concern in the life business, however, is more about how to close the sale once we have identified that need.

The hurdles presented by underwriting foreign nationals who do not reside in the U.S. are many, but there are pockets we have identified with relatively clear paths to follow. Obviously, these cases are all very unique and the country of origin and travel details are critical variables. There is the possibility, however, of being able to complete the cases with carriers you already work with and, in some instances, even complete the medical requirements in the home country.

The exam is really just the tip of the iceberg, and if the client owns property here, having the exam done in the U.S. is really not that large an issue. The rest of the case, however, can be a bear. Medical records retrieval and translation, financial documentation, and inspection reports are all far more complicated than in a "domestic" case. You'll need a competent guide through this process.

Did a particular client come to mind when you read this? Remember, simply because the client did not know about the tax does not mean they don't have to pay it. Ignorance is no excuse!