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The Interplay of Tax Treaties and Foreign Tax Credit

While U.S. citizens and residents are subject to federal estate tax on worldwide assets, the non-resident alien’s estate is subject to federal estate tax only on U.S. situs assets, consequently “situs” has an important role to play in estate planning for many cross-border families.

Situs generally:  The general situs rule is that tangible assets physically located in the U.S. are subject to federal estate tax, but the situs rules for intangible property are somewhat involved and complicated. For instance, an asset can be non-U.S. situs for gift tax purposes but U.S. situs for estate tax purposes. Here are the general situs guidelines for non-resident aliens and their U.S. estate tax exposure:

  • Real Property – Land, structures, fixtures and renovations/improvements located in U.S. are U.S. situs.
  • Tangible Personal Property – property physically inside the U.S. is U.S. situs. This includes physical dollars or other currency.
  • Intangible Personal Property – U.S. situs will depend on the character of the investment:
  • Business Investment Funds – funds used in conjunction with a U.S. trade or business and held in bank or brokerage (including domestic branches of foreign banks), are U.S. situs.
  • Personal Investment Funds, including:
    • Checking or Savings – demand deposits in U.S. banks are non-U.S. situs, while money market funds or cash in a brokerage account are U.S. situs.
    • Qualified Retirement Plans – if funded through U.S. employment are U.S. situs.
    • Stock – if issued by a U.S. corporation, are U.S. situs, even if stock certificates are held abroad. (Stock/ADRs in non-U.S. corporations are non-U.S. situs assets, even if purchased and/or held in the U.S.)
    • Bonds – The U.S. passed a law in 1989 that created a “portfolio exemption” for publicly traded bonds, including treasuries, so they will not be considered U.S. situs. Privately offered debt instruments issued by U.S. organizations may still be considered U.S. situs.
    • Life Insurance and Annuities – if issued by a U.S. licensed insurance company will be considered U.S. situs assets. (Policies issued by foreign-licensed insurance companies abroad will not be U.S. situs assets.)
    • Annuities – if issued by a U.S. licensed insurance company will be considered U.S. situs assets (Policies issued by foreign-licensed insurance companies abroad will not be U.S. situs assets).