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Foreign Residents Must Consider US Estate Tax When They Invest

01/25/2024

(This article was originally published in Bloomberg Tax by Jimmy Sexton. Link to the article here.) 

According to the US Bureau of Economic Analysis, foreign investment in the US increased $212.2 billion to $6.58 trillion by the end of 2022, and likely increased further in 2023. These numbers clearly demonstrate that the US is a popular investment destination for foreign investors.

While it may be a sound investment, the tax consequences of investing in the US can be devastating absent proper tax planning. One aspect of US taxation that frequently catches foreign investors off-guard is the US estate tax.

US estate tax applies differently to US citizens and domiciled non-citizens than it does to non-domiciled non-citizens. The domiciliary status of a non-citizen is the key factor in determining how the estate tax will apply.

Residence and domicile aren’t synonymous. Residence is where one currently lives; it can be permanent or temporary. Domicile, on the other hand, is a person’s permanent home—the place they plan to always return to. A person’s residency and domicile needn’t be the same.

Let’s say a Spanish citizen and resident who considers Spain home, and plans to always return there, takes a three-year work assignment in the US. In this case, they would be US resident while living in the US but would remain domiciled in Spain.

For US tax purposes, residence determines how one is treated for income tax purposes and domicile determines how one is treated for gift and estate tax purposes. The US levies estate tax on the fair market value of assets. Federal estate rates range from 18% to 40%; some states also levy an estate, which can reach as high as 20%, depending on the state.

Mr. Sexton is founder and CEO of Esquire Group, a tax and wealth advisory firm.