One aspect that US citizens working and residing outside the United States rarely consider is dying outside the United States. More likely than not, this will also expose your estate to foreign “death duties” as well as US estate tax. The US only has estate tax treaties with 18 countries with 13 of them being in Europe.

Foreign estate tax

While a recitement of the foreign estate tax in each country is beyond the scope of this article it would be prudent for an expatriate to ascertain if the country in which they reside has an estate tax treaty with the United States and if not, to obtain local tax advice as to whether they will be subject to estate tax (death tax) in their country of residence.

We have had experience in the past where a client had died in a foreign country and said country did not allow the decedent to leave the country until all “death taxes” had been paid.

US Federal estate tax

Under current US estate tax law each individual can exclude $5,430,000 from US estate tax. For 95 per cent of US citizens and resident aliens they will never have to worry about US Federal estate tax. For those who come within the top 5 per cent in assets a change in the law in 2010 had final regulations published in June 15 explaining how the portability of the estate tax exemption between spouses works.

For example, if spouse A dies in 2015 with a $3 million estate they have an unused exclusion amount of $2,430,000. The decedent’s estate can make a portability election to transfer to spouse B the unutilised exclusion amount of $2,430,000. Spouse B would then have a total exclusion of $5,430,000 plus $2,430,000, or $7,860,000 in total. As the exclusion is indexed this amount will likely increase by $50,000 to $100,000 a year.

As mentioned, the unused exclusion does not automatically transfer between spouses. An election to do so must be made by timely filing an estate tax return within nine months after the date of the decedent’s death.

Typically with a large estate an extension of time to file the estate tax return is requested for a period up to a year. And while the IRS may grant an extension of time to file the estate tax return the final regulations specifically state that the IRS may not grant an extension of time to elect portability.

The hidden trap for the uninformed is that since spouse A’s estate was less than the $5,430,000 threshold there is no requirement to file a US estate tax return.

Hence, if you want to make the portability election the estate tax return must be filed within the nine-month period after the date of the decedent’s death. Once made, the election is irrevocable.

State estate tax

The majority of States impose on a decedent an estate tax, an inheritance tax or both on estates starting as low as $600,000. Each State has different laws as to who the tax is imposed on and the threshold.

Are Bermuda nationals subject to US estate tax?

In certain circumstances the answer is yes. The US Federal estate tax is imposed on the transfer of a person’s property at the time of a person’s death. The gross estate of a US person or resident decedent includes the value of all property; real or personal, tangible and intangible, wherever situated. The word “person” is not defined as applying to only a US citizen or resident. A non-US person who has US situs assets at death is subject to US Federal estate tax.

For a Bermudian or other foreign nationals US situs property commonly refers to a residence or other living accommodation owned in the United States and the ownership of US stocks, bonds or other financial instruments. The situs of a house, condominium or timeshare is straight forward in that it either is or is not in the United States. If you own 5,000 shares of Citibank that has a fair market value at death of $75,000 you have a US situs asset. It does not matter whether the stock certificate is in shoebox in your closet, your bank safe deposit box or only exists as a line item in the monthly/quarterly statement that you receive from your local investment advisor. We have had people argue with us that the stock was really bought in the name of their local broker and that they do not really own the stock that it is just allocated to them. Such argument is superficial in that the Internal Revenue Service has “look through” rules that readily identify the owner of the stock. Basically, if it is in your account you own it.

The US Federal estate tax ranges from 18 per cent on the first $10,000, 30 per cent at $100,000 and 40 per cent on assets over $1,000,000. A foreign national can only exclude $60,000 of US situs assets from US estate taxation.

Can a non US person invest in a US situs asset and avoid paying US estate tax on their demise? The answer is yes, with proper tax planning. If you intend to invest in any US situs asset before you do so you should seek US tax advice.

Bermuda estate tax on foreign nationals

Bermudians usually express surprise when informed that their US situs property is subject to US estate tax. But the US law mirrors Bermuda law. I know a person who owns a fractional share in Bermuda has never seen the unit and has not been to Bermuda in over 40 years. It is simply an investment. And if the person still owns the fractional unit upon his demise the Bermuda Government will subject his estate to “death duties.”

Pursuant to the requirements relating to practice before the Internal Revenue Service, any tax advice in this communication is not intended to be used, and cannot be used, for the purpose of (I) avoiding penalties imposed under the United States Internal Revenue Code, or (ii) promoting, marketing or recommending to another person any tax related manner.

The tax advice given by this column is, by necessity, general in nature. You should, of course, check with your own US tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances.

James Paul Sabo, CPA, is the president of ETS Ltd., PO Box HM 1574, Hamilton HM GX, Bermuda. Questions should be sent to: jsabo@expatriatetaxservices.com