US citizenship or assets? Don’t risk excess estate tax on your death

By James Whiley and Isabella Urso

Are you a United States (US) citizen, Green Card holder or own assets in the US? Without proper US tax planning advice, you could end up paying more than necessary in US estate taxes.

What is US estate tax and when does it apply?

US estate tax can apply to US citizens (even if they own no US assets), Green Card holders, people who have made the US their permanent home and non-US citizens who own US assets at their death.

Am I a US citizen?

If you were born in the US, you are a US citizen, even if you’ve never lived or worked in the US and neither of your parents were a US citizen at the time of your birth.

If you were not born in the US, but one or both of your parents was a US citizen at the time of your birth, you may be a US citizen.

Holders of green cards and people who have made the US their permanent home will most likely be subject to the US tax regime in the same manner as a US citizen.

What does this mean for US transfer tax?

US citizens

US citizens are subject to US transfer tax (gifts made during their lifetime, if not exempt, and transfer of assets on death) on their worldwide assets, which exceed the current (2024) threshold of US$13.61 million (adjusted annually for inflation). Worldwide assets can include trusts the US citizen controls.

If the proper election is made on the death of the first spouse, the surviving spouse may have a possible combined exemption of US$27.22 million. Any gifts made during the US citizen’s lifetime count as part of the threshold, which is reduced accordingly.

After 2026, it’s uncertain what thresholds will apply. The amendment to the US Tax Code increasing the basic exclusion amount is due to cease on 31 December 2025, and revert to its pre-2018 level of US$5 million (adjusted annually for inflation), unless Congress takes action.

Non-US citizens

If a non-US citizen owns US assets, US transfer tax may be payable on their death if the US assets exceed the threshold of US$60,000. If tax is imposed, a reduction may be available under a treaty between the US and Australia on the transfer tax payable.

What constitutes property located in the US?

The following examples constitute property located in the US for the purposes of US transfer tax on the death of a non-US citizen:

• real property located in the US;
• shares of stock issued by a US corporation (eg News Corporation shares); and
• assets located in the US held in a trust if you have (or had within three years of death) ‘retained powers’, such as the power to change the trust and a retained interest in the assets of the trust funded by you.

A general power of appointment over property that was relinquished prior to death, even if it was within three years of death, will not be included in the estate. However, there may be a gift tax component at the time of relinquishment.

There are exceptions to what constitutes property located in the US, which include amounts receivable as insurance on the life of a non-US citizen and bank deposits in US banks (unless it is a business account).

How can I address my exposure to US estate tax?

You may be able to address your exposure to US estate tax with strategic lifetime gifting and bespoke succession planning.

Lifetime strategies

There are exemptions from the transfer tax on gifts. When utilised, these gifts don’t incur a transfer tax liability or affect a person’s current threshold. In 2024 (noting these amounts are subject to change each year), a US citizen can:

• make a gift of up to US$185,000 to their non-US citizen spouse;
• make gifts of up to US$18,000 per person to children or any other person; and
• make gifts for medical expenses and tuition fees up to a maximum amount each year.

For Australian domiciles, including citizens, the following strategies are available:

• using a limited liability company (LLC) in the US to hold tangible US property and US real estate (because shares are intangible property, they aren’t subject to gift tax when transferred during life); and
• establishing a partnership in NSW between two discretionary trusts to hold property in the US.

The strategies may not work for every situation. Before transferring US assets, it’s important to seek advice from both US and Australian tax experts. The same goes for non-US citizens buying US assets – they should seek advice beforehand.

Bespoke succession planning strategies

When a US citizen is in a relationship with a non-US citizen, careful planning is required. This prevents increasing the US citizen’s worldwide assets if, upon the non-US citizen’s death, assets are directly inherited by the surviving US citizen spouse. Similarly, it’s not ideal for a US citizen to leave property located in the US to a non-US citizen spouse.

• If a US citizen is married to a non-US citizen who isn’t a US domicile, the surviving non-US citizen, who is not a US domicile at the time of death, will not be able to use any of the prior deceased spouse’s unused portion of the current threshold of US$13.61 million. However, it’s possible to ‘defer’ the transfer tax payment by putting the estate into a Qualified Domestic Trust (QDOT). This trust can be set up after the US citizen’s death but before the due date of the first tax return filed after their death. The rules for a QDOT must be followed strictly. There needs to be at least one trustee who is either a US citizen or US domestic corporation. Any distribution of capital (except for hardship related to a spouse’s health, maintenance, education or support, or the same for any person the surviving spouse must support) triggers taxes, as does the death of the surviving spouse.
• Another key solution is establishing a ‘Support Trust’ under a Will. This is particularly beneficial for US citizens in a relationship with a non-US citizen who holds most assets (being a common structure to minimise assets in the name of a US citizen). If the non-US citizen dies first, the US citizen partner can receive their inheritance in a ‘Support Trust’ that they control. The survivor can make distributions covering health, education, maintenance and support (HEMS), which are broad categories ensuring the survivor’s usual standard of living. The Will also appoints a ‘Special Trustee’, an independent person who can make distributions for anything outside of HEMS, if it’s not part of the survivor’s usual standard of living. The usual standard of living is determined at the time the first partner dies. When done correctly, this approach can protect the assets of the first deceased spouse from becoming part of the US citizen spouse’s estate upon their death.

What else should I consider?

This article primarily discusses US transfer tax, but individuals should also seek professional advice regarding asset distribution upon death or incapacity.

It’s crucial to consider whether to have Wills and the equivalent of enduring powers of attorney, which deal with financial decisions in case of mental incapacity, in both the US and Australia. The succession of real estate follows the laws of the country or state where it’s located, while succession to other assets (movable property) is determined by an individual’s domicile (state-based in Australia and the US) at the date of death.

Due to lengthy administrative delays in probate proceedings in the US, it’s typically advisable to have Wills in both countries, carefully drafted to prevent accidentally revoking each other. This allows for more flexibility in Australian estate planning, such as incorporating asset protective and tax-effective testamentary trusts into Australian Wills.

Relinquishing US citizenship is also an option, but it may result in significant tax liabilities. Professional advice is essential before deciding to relinquish US citizenship.

How do US tax authorities discover foreign accounts?

The introduction of the Foreign Account Tax Compliance Act (FATCA), based on US citizenship, and the Common Reporting Standard (CRS), based on tax residence, has facilitated the exchange of information between tax authorities. This exchange provides tax authorities with greater access to financial account data of taxpayers.

With FATCA and CRS aiming to automate the exchange of information between tax authorities, it’s more likely the US tax authorities will possess information about US citizens living abroad.