US citizenship or assets? Don’t risk excess estate tax on your death
By James Whiley
Are you a US citizen, Green Card holder or do you own assets in the US? You may be about to pay more in US estate taxes than you should if you had obtained appropriate US tax planning advice.
In this next instalment of our international succession planning series, we address two key questions.
- What is US estate tax and when does it apply?
- How can I address my exposure to US estate tax?
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.
If you're a US citizen, Green Card holder, someone who's made the US their permanent home, or even a non-US citizen with US assets, you could be liable for US estate tax on your death.
US estate tax applies to the worldwide assets of US citizens if they exceed the current threshold of $12 million US dollars. This applies to both transfers of assets on death, as well as gifts made during the US citizen's lifetime, which reduce the threshold accordingly. There is the possibility to transfer any unused portion of your threshold to a surviving spouse to give a combined total exemption of just over $24 million US dollars. For non-US citizens who own US assets, the threshold is only $60,000 US dollars.
There are two key ways to mitigate against US estate tax exposure. The first is through strategic lifetime gifting, and the second is through bespoke succession planning. Looking first at lifetime gifting, there are exemptions for US citizens making gifts during their lifetime. For example, in 2022, a US citizen is able to gift $164,000 US dollars to their non-US citizen spouse without affecting their threshold. There are also options available for Australian domiciles. For example, establishing a limited liability company in the US to hold certain US property. Because when a transfer of these shares is made during their lifetime, this does not incur any gift tax.
Having a look at succession planning, one key strategy is to defer the payment of estate tax. And you can do this by transferring the estate of the first deceased spouse into what's known as a qualified domestic trust or a QDOT. This means that estate tax will only be payable on the death of the second spouse. Another option is to establish a support trust in your will. If structured correctly, this means that a US citizen can receive their inheritance from a non-US citizen spouse, and it will not form part of their estate on their subsequent death.
Hall & Wilcox can advise you on these various strategies, and it's better to consider it sooner rather than later. We work with you and trusted US lawyers to provide a solution that's bespoke and tailored to your situation. And we'll work from both a US and Australian tax and succession planning perspective.
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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 (2022) threshold of US$12.06 million. Worldwide assets can include trusts that the US citizen controls.
This threshold applies to estates of persons dying in 2022 and before the start of 2026.
If the proper election is made on the death of the first spouse, the surviving spouse may have a possible combined exemption of US$24.12 million. Any gifts made during the US citizen’s lifetime count as part of the threshold which is reduced accordingly.
After 2026, it is uncertain what thresholds will apply (and are looking likely to reduce), so you should act now even if you are below the current threshold.
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.
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.
There are exemptions from the transfer tax on gifts. When utilised, these gifts do not incur a transfer tax liability or affect a person’s current threshold. In 2022 (noting these amounts are subject to change each year) a US citizen can:
- make a gift of up to US$164,000 to their non-US citizen spouse;
- make gifts of up to US$16,000 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 (as the shares are intangible property, they are not subject to gift tax when transferred during life); and
- establishing a partnership in NSW between two discretionary trusts to hold property in the US.
Succession planning strategies
Our previous articles (‘US citizen – who me? Beware the dreaded US estate and gift tax’ and ‘US citizens – President Trump reforms US estate and gift tax’) outlined some key strategies for addressing US estate tax exposure on death, including deferring the payment of transfer tax by transferring the estate to a Qualified Domestic Trust (QDOT).
In this article, we consider further another key solution of establishing a ‘Support Trust’ under your 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 into a ‘Support Trust’ of which they are in sole control regarding distributions that maintain their usual standard of living. This covers their health, education, maintenance, and support (HEMS), being noticeably broad categories. The Will also appoints a ‘Special Trustee’, being an independent person who can make distributions to the surviving partner for anything outside of HEMS, if the intended use of the funds is outside the usual standard of living of the survivor. The usual standard of living is determined at the time the first partner dies.
If structured correctly, this approach may shelter the assets of the first deceased spouse from forming part of the estate of the US citizen spouse on their subsequent death.
How can Hall & Wilcox help?
Although we are unable to provide advice on US law (and this article does not constitute advice, so must not be relied upon as an alternative to comprehensive US and Australian legal and tax advice), we are aware of the US issues, as we regularly deal with clients with such issues. We can work with you, your Australian tax advisers and trusted US lawyers to provide a tailored approach that works from a US and Australian tax and succession planning perspective.
A belts and braces succession plan is invaluable for your loved ones – who would otherwise be left to deal with the aftermath of poor planning. The added complexity of US estate tax exposure means this should be considered as soon as possible.
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