961 / What assets of a foreign individual (nonresident alien) are subject to U.S. estate tax?

Unlike a U.S. citizen, who is subject to estate taxation on worldwide assets, the gross estate of a nonresident alien (meaning, a foreign individual who is not a U.S. citizen or resident alien) only includes property that is situated in the U.S. at the time of the nonresident alien’s death.¹

For purposes of determining what property is situated in the U.S., any property which the decedent has transferred, by trust or otherwise, which would be taxable within the provisions of IRC Sections 2035 through 2038 (relating to termination of certain property interests within three years of death, transfers with a retained life estate or to take effect at death, and revocable transfers), is deemed situated in the United States if it was so situated either at the time of the transfer or at the time of death.²

For a decedent who was a nonresident alien at the time of death, property is considered located in the U.S. if it falls into any of the following categories:

(1)     Real property located in the U.S.;

(2)     Tangible personal property located in the U.S., including clothing, jewelry, automobiles, furniture or currency. Works of art imported into the U.S. solely for public exhibition purposes are not included;

(3)     A debt obligation of a citizen or resident of the U.S., a domestic partnership or corporation or other entity, any domestic estate or trust, the U.S., a state or a political subdivision of a state or the District of Columbia; or

(4)     Shares of stock issued by domestic corporations, regardless of the physical location of stock certificates.³

However, in the case of a nonresident alien who dies while in transit through the U.S., personal effects are not considered located in the U.S. Neither is merchandise that happens to be in transit through the U.S. when a nonresident alien owner dies.

The IRS has also addressed certain assets and found that they are specifically excludible from a nonresident alien’s gross estate as being “without the U.S.” The following non-exhaustive list of the property owned by a nonresident alien is not considered to be situated within the U.S. for calculating the gross estate:

(1)     A bank account that is not used in connection with a U.S. trade or business;⁴

(2)     A deposit or withdrawable account with a savings and loan association chartered and supervised under federal or state law or an amount held by an insurance company under an agreement to pay interest on it. But the deposit or amount must not be connected with a U.S. trade or business and must be paid or credited to the decedent’s account;⁵

(3)     A deposit with a foreign branch of a U.S. bank if the branch is engaged in the commercial banking business;⁶

(4)     A debt obligation, the interest on which would be exempt from income tax under IRC Section 871(h)(1), relating to tax-exemption for interest earned by nonresident aliens with respect to portfolio debt investments;⁷

(5)     Stock issued by a corporation that is not a domestic corporation, even if the certificate is physically located in the United States;⁸

(6)     An amount receivable as insurance on the decedent’s life;⁹

(7)     Certain original issue discount obligations;¹⁰ and

(8)     Certain stock that a nonresident alien owns in a regulated investment company (RIC) at the time of his or her death.¹¹

If the decedent was a citizen or resident of one of the countries with which the U.S. had an estate tax treaty in place, the provisions of the treaty may override the normally applicable provisions of the Internal Revenue Code that are outlined above.