19 August 2014 0 Comments

Special Estate Needs of Foreign Nationals

shutterstock_129797951Non-resident aliens who own U.S. real estate.

Non-resident aliens who directly own certain U. S. assets are exposed to U.S. estate tax liability and only $60,000 may be exempt from this tax, not the $5,000,000+ exemption normally allowed for U.S. citizens.  Here’s an example:

Pedro Sanchez is not a U.S. citizen and is a resident of the Dominican Republic.  On his last trip to Miami he purchased a $4,000,000 condominium in South Beach which he visits three times a year.  By buying this property and owning it outright, Pedro created a U.S. taxable estate and as a Non-Resident Alien he is only afforded a $60,000 estate tax exemption.  If he were to die this year, when the top rate is 40%, his estate would owe $1.53 million in taxes.  If the value of his real estate grows at an annual rate of 3%, in 10 years its value would have increased to $5.219 million and the tax would be over $2,000,000 if death occurred in that year.

Pedro could buy a life insurance policy large enough to cover the estimated tax liability.  Since the death benefit of Pedro’s policy is not subject to U.S. estate tax his estate would have enough cash to pay the estate tax and the condominium can stay in the family.

Loss of full marital deduction for Foreign-National spouses.

Married couples may generally leave 100% of their assets to each other at the death of one spouse with no estate tax imposed regardless of the size of the estate.  This full marital deduction provides for planning concepts that often include the use of a second-to-die life insurance policy since no tax will be due until the second of then dies.  However, that full marital deduction is not extended to a spouse who is a Foreign-National, so if life insurance is to be a part of the estate plan, the second-to-die policy won’t work.

Foreign country inheritance taxes.

Most foreign countries do not have an estate tax comparable to ours, but some have inheritance taxes which can be addressed with U.S. life insurance policies to provide for liquidity.  Non-U.S. citizens who face this tax might consider using a life insurance policy issued by a U.S. company to provide for liquidity.

Next…a continuation of some special life insurance considerations for Foreign-Nationals.

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