Did you know that if you’re a nonresident with assets in the United States and haven’t set up your estate planning documents yet, your family will likely have to navigate through a probate process? However, that’s not all; they may also face estate taxes. Whether you own property, a business, or a bank account, it’s essential to understand the implications for these assets in the event of your passing.
Estate Tax Implications
Nonresident individuals who are not U.S. citizens may find themselves subject to U.S. estate tax on their U.S.-based, technically called U.S. situs assets. These assets can include real estate, certain types of personal property, and stocks in U.S. companies. However, it’s essential to note that some assets, such as certain bank accounts and life insurance proceeds, are exempt from this tax.
The value of the U.S.-based assets is critical in determining the tax liability. Executors must assess the total value of assets within and outside the United States, known as the “gross estate in the United States” and the “gross estate outside the United States.” These valuations are based on the fair market value of the assets at the time of the individual’s death.
Calculation and Filing Requirements
To calculate the estate tax, deductions such as funeral expenses and unpaid debts can be subtracted from the gross estate to arrive at the “taxable estate.” Additionally, any lifetime taxable gifts made by the deceased may need to be factored into this calculation.
If the total value of U.S.-based assets, combined with taxable gifts, exceeds $60,000, the executor is required to file Form 706-NA with the Internal Revenue Service (“IRS”) within nine months of the individual’s death, unless an extension is granted. Executors should also be aware of any estate tax treaties between the U.S. and the individual’s home country, as these treaties can affect the amount of tax owed.
Probate Process
In cases where a nonresident individual passes away with U.S. assets and no designation of beneficiaries, the estate typically goes through the probate process. Probate is the legal process through which a court validates a deceased person’s will, if one exists, and oversees the distribution of assets according to state law.
During probate, the court will appoint an executor or personal representative to manage the estate’s affairs. This individual is responsible for identifying and inventorying the decedent’s assets, paying any outstanding debts or taxes, and distributing the remaining assets to the rightful heirs or beneficiaries.
Understanding the Consequences
Recipients of assets from a nonresident individual’s estate must understand their potential liability for unpaid estate taxes. The IRS has provisions for transferee liability, allowing them to collect any unpaid estate tax from those who receive distributions from the estate. Ensure your family’s financial security by addressing these matters proactively. If you need help understanding the intricacies of the taxation landscape or setting up your estate planning documents, contact us today.