US estate tax is assessed on the value of a deceased individual’s assets at the time he or she passes. The US government will generally only charge this tax on estates whose values exceed $11.4 million in 2019 and $11.58 million in 2020. If the value of an estate exceeds these amounts for the applicable years, a foreign estate tax return (Form 706) must be filed with your US expat taxes.
For 2019, you can exclude up to $11.4 million of your estate. Beyond this, federal estate tax rates are progressive, ranging from 18% to 40% for 2019. Some states also impose estate taxes.
However, this isn’t the only factor used to determine estate liability on US expat taxes. One important item to note is that gift and estate taxes are “unified.” Each year, a person can gift up to $15,000 (for 2019 and 2020) per individual tax-free. Beyond this annual exclusion, you can choose to pay taxes on the excess or include the excess amount in your sheltered estate. As gifting can either decrease or increase the value of the estate, it’s often an important part of tax planning. You can read more about gift taxes in our US Expat Taxes Explained series.
Foreign Tax Credits for Estates
Similar to the foreign tax credit we’re accustomed to seeing on our annual US expat taxes, there is a foreign tax credit for estate taxes as well. If, as a resident of a foreign country, your estate was taxed at the local level, those taxes paid can be used as a credit on your US expat taxes.
Your US Expat Taxes and a Non-Resident Alien Spouse
What if my spouse is not a US citizen or a resident? How will he or she handle the US expat taxes related to my estate? This is a great question, and it’s good you’re planning ahead! Unfortunately, a non-resident alien spouse does not qualify for the surviving spouse (aka marital) exemption, and the US citizen spouse’s estate will be taxed upon their death. All of the US property owned by the US spouse will get passed to the non-US spouse at death, and will be taxed with only a minimal exemption. The good news is that any property owned by the US spouse outside of the US will not be subject to US expat taxes.
There are different strategies to help counteract these rules. One is to move assets outside of the US, so they will not be subject to US estate tax upon the owner’s death. However, this will likely create an FBAR reporting requirement, and could potentially prompt the IRS to begin questioning your motives. The earnings from these foreign accounts will still be taxable in the US, and reportable on your US expat taxes.
Another strategy is for the non-resident alien spouse to apply for US citizenship. Although residence in the US is required, this would allow the spouse to qualify for the surviving spouse exemption, and inherit up to $10 million in assets tax-free. This is an uncertain strategy, as citizenship isn’t guaranteed, and many expats do not desire to come back to the US.
A third option is to move the assets owned by the married couple into the non-resident alien spouse’s name. There are several drawbacks to this strategy, such as the unknown of who will die first, taxation responsibilities in the resident country, and the possibility of divorce. However, this an effective strategy for reducing US expat taxes associated with the estate of the US citizen spouse.
Renouncing Your US Citizenship to Avoid the Estate Tax for Foreigners
In prior years, many high-wealth individuals started the trend of moving abroad and renouncing their US citizenship to reduce estate tax for foreigners on their benefactors upon their death. These larger gifts can mean a very high burden on US expat taxes. This trend became so popular that the Internal Revenue Service decided to put policies in place to prevent this, such as the “exit tax.” The exit tax assumes that the former US citizen is selling all of their worldwide assets, and taxes the entire value of the estate at either ordinary or capital gains rates, depending on the type of asset.
Renouncing citizenship to avoid taxation is not recommended. If you’re considering moving abroad and renouncing your US citizenship, it is possible that you will be required to reside outside of the US for more than ten years before becoming exempt from US expat taxes.
Estate Planning for US Citizens Living Abroad
As seen in the example above, high-wealth individuals run the risk of their estate having significant US expat tax liability. We will discuss several different tax planning strategies below for estate planning for US citizens living abroad. If you are considering implementing one of these strategies, consult your tax advisor for more specific advice regarding your individual situation. and your foreign estate tax.
- Commit to the Love of Your Life: Getting married is perhaps the simplest estate tax planning strategy there is. If you marry a US citizen, you will qualify for up to $22.8 million in federal estate tax exemptions for 2019. If you marry a non-resident alien, you still have some options as discussed above.
- Create a Trust: Trusts are one of the most common forms of reducing estate tax liabilities. There are a variety of trusts that can be created, including Irrevocable Life Insurance Trusts, Charitable Remainder Trusts, and Qualified Personal Residence Trusts. Each one of these has its different advantages and disadvantages, so research the most beneficial for your situation before creating one.
- Be Generous in Gifting Before Death: As discussed briefly above and more thoroughly in our Gift Taxes article, each US citizen could gift up to $15,000 each year tax-free (for 2019 and 2020). By taking advantage of this, people can reduce the value of their estate significantly if planned enough in advance. Furthermore, you will make your friends and family very happy and secure a well-attended wake.
- Spend, Spend, Spend!: Another very simple way to reduce the estate’s value is to spend the money before you die! This seems pretty straightforward, and really it is. However, you never know how long you will live. Additionally, you will need to be careful on how you spend it as real property (land, buildings, etc.) will be included in the value of your estate.
More Questions About US Expat Taxes and Estates?
Originally published on October 27, 2011. Updated on March 2020.