Nonresident Alien Estate Tax Laws

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 Nonresident Alien Estate Tax

In general, the term “alien” refers to any person who is not a U.S. citizen or U.S. national. The Internal Revenue Service (“IRS”), which is a federal agency of the U.S. government that oversees taxes and enforces tax laws, further divides aliens into two categories for tax purposes: resident aliens and nonresident aliens. 

According to the IRS, a nonresident alien is an alien who has not passed the substantial presence test or the green card test. On the other hand, a resident alien is an alien who has passed either one of these two tests for the current calendar year.

Another difference between the two tax categories is that resident aliens must follow many of the same tax rules as U.S. citizens. In contrast, nonresident aliens may be subject to different tax rules, filing locations, and deductions. 

In regard to estate taxes, some nonresident aliens may need to file and pay taxes on assets or property that are located in the United States. An estate tax is basically a tax that is imposed on the value of an estate of a deceased person before it gets distributed to any of their heirs or beneficiaries. As such, the fiduciary representative for a nonresident alien will need to keep this legal obligation in mind when handling distribution of a decedent’s estate. 

The primary form used for filing nonresident alien estate taxes is Form 706 or Form 706-NA, depending on the circumstances surrounding a decedent’s estate. Some other items that must be submitted with a decedent’s estate tax return include:

  • A copy of the decedent nonresident alien’s death certificate;
  • A copy of the decedent nonresident alien’s will and/or trusts;
  • A copy of each property appraisal;
  • A copy of any litigation-related documents involving the decedent’s estate;
  • A copy of a U.S. gift tax return filed by a decedent (if applicable); and 
  • Documents or receipts for any unusual assets claimed on the estate tax form (such as partial losses, only some of a decedent’s assets, property transfers near or after the decedent’s date of death, etc.).

Finally, the Internal Review Code (“IRC”), which is the primary federal tax law for the United States, is a very complicated set of laws. Thus, it can be difficult for nonresident aliens to determine what types of property they may need to file and pay taxes on, and whether they are eligible for any tax deductions or exemptions. 

Therefore, if you are a nonresident alien or the fiduciary representative for a nonresident alien, then it may be in your best interest to consult an estate planning attorney for further guidance on U.S. estate taxes. An estate planning attorney will be able to explain your duties under the IRC and can provide specific advice on any concerns you may have about your estate taxes.

On What Property Does the U.S. Impose the Estate Tax?

As previously mentioned, an estate tax is basically a right to transfer property (e.g., both tangible and intangible assets) owned by the deceased at the time of their death. In order to calculate federal estate taxes, the IRS will request that a nonresident alien provide the total amount of assets they own that are located in the United States, as well as the total amount of assets they own that are located outside of the United States.

Some common property items that the U.S. government may impose estate taxes on include:

  • Real estate;
  • Insurance;
  • Trusts;
  • Cash and/or securities (e.g., stocks, bonds, etc.);
  • Annuities;
  • Business interests (e.g., business located in the U.S. or a bank account associated with that business);
  • Debts owed to a person or entity in the U.S.;
  • Jointly owned property;
  • Certain gifts; and/or
  • Various other assets.

The amount of total property situated in the United States must be calculated by using the fair market value at the time of the decedent’s death, not when the property and/or assets were first purchased. In addition, some of the items in the above list may be eligible for a deduction or an exemption. Thus, a fiduciary representative should make sure that they account for any deductions or exemptions before evaluating and providing the total amount of assets.

What Deductions Are Allowed for the Estate of a Nonresident Alien?

Similar to resident aliens and U.S. citizens, nonresident aliens also may enjoy some deductions for estate taxes. An estate tax deduction is an expense that is subtracted from the total sum of estate taxes owed, which can help reduce the amount of estate taxes that a deceased individual’s family members will need to pay.

In general, there are four kinds of expenses that may qualify as an estate tax deduction. These include:

  • Funeral expenses (e.g., ceremony fees, cemetery charges, burial arrangements, etc.);
  • Administrative expenses, such as fees for attorneys, the executor, a trustee, probate proceedings, and accountants;
  • Legal debts (e.g., last utility bill, credit card balances, final income tax return, etc.); and
  • Any mortgage payments, liens, or claims tied to real estate.

A nonresident alien may be eligible for all of these standard estate tax deductions. A nonresident alien may also qualify for certain marital and charitable deductions, as well as a reduction on substantial lifetime gifts. 

Also, in many cases, a nonresident alien’s fiduciary representative will typically be allowed to transfer up to $60,000 of assets and/or property located in the U.S. at the time of the decedent’s death without having to pay any estate taxes at all.  

In addition, there is a credit for $13,000 that some decedent nonresident aliens may be eligible for, which will exclude the estate tax due on the initial $60,000 of property and/or assets. Some other assets that may be exempted from U.S. estate taxes include bank accounts that are not associated with a business or trade in the U.S., insurance proceeds, and securities that produce interests on a portfolio. 

Do I Need an Estate Planning Attorney?

It is very important for both nonresident aliens and resident aliens to know which tax laws they may be subject to and exactly how they can comply with those tax laws. Failure to file and pay taxes can result in significant fines. Thus, if you are a nonresident alien and need assistance with estate taxes, then it may be in your best interest to speak to an estate attorney for further guidance.

An experienced estate planning attorney can inform you of your rights and estate tax requirements under U.S. law. Your lawyer can also help you file your estate taxes, can tell you how you can amend any late filings, and will be able to determine whether or not you qualify for any estate tax deductions. 

In addition, an estate planning attorney can also find out whether you qualify for the unified credit exemption, can help you claim any refunds or benefits that you may be owed, and can answer any questions you may have about filing and paying your estate taxes. 

Finally, some estate planning and/or estate tax issues may require reviewing estate tax treaties that exist between the United States and other countries. These treaties may offer favorable benefits for a decedent nonresident alien’s estate, such as not having to pay estate taxes on certain assets. Accordingly, an estate planning attorney can be useful in interpreting these treaties and their requirements for you as well.

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