Estate tax for non-citizens
It’s said that there are only two guarantees in life: death and taxes. With the estate tax law, life deals you both in a single blow. Estate tax is the tax collected on your estate if you die, before it transfers to your heirs. It’s been around in its modern form since 1916, but because it’s rare outside of the United States, many non-citizens aren’t familiar with it. That’s where we come in. As Orlando’s premier foreign buyer’s agents, the Authentic Real Estate Team has helped countless foreign clients gain a better understanding of this law, and of how they can protect their assets against it.
The estate tax law states that for American citizens, any asset worth over 5 million dollars is taxable at a rate of between 35 and 40% of the home’s net value. For non-U.S. citizens, the cutoff for exemption is only $60,000, though on the bright side, rates are fixed at a flat 35%. But even if your asset is appraised above the cutoff—and if you’re a foreigner, it likely will be—there are ways to protect your assets, and your heirs, from this ruthless piece of legislation.
How To Protect Your Assets Against Estate Tax
For American couples with estates valued above 5 million dollars, bypass trusts are their best option for protecting their assets from exorbitant estate taxes. If you want to learn more about bypass trusts, check out our article, Estate Tax For U.S. Citizens, on our Buyers’ Resources page. However, if you’re a foreigner, the two best ways to protect your estate are to take titleship as a business entity, or to take it with right of survivorship. We’ve outlined both of these options below.
- Estate tax for non-citizens – Titleship as a Business Entity: One of the many benefits of taking titleship as a business entity is that it can protect you against estate tax. By holding your title as an LLC with multiple members, you can protect your asset in two ways. First, depending on how you set up the LLC, the decedent member’s interest in the estate can be made to redistribute automatically to the surviving members without being taxed. Second, if the divided interests in the estate are valued at or below $60,000, they will be exempted from estate tax upon the death of any one member. So, for example, if a $180,000 estate is divided amongst a three-member LLC and one member dies, their $60,000 share will be exempted from estate tax before it distributes to the surviving members.
- Estate tax for non-citizens – Titleship with Right of Survivorship: Another way foreigners can protect their estates and heirs is by taking title with right of survivorship. This strategy also has two variants. The first, called “tenancy by the entirety,” is only available to married couples. This type of titleship treats the couple as a single owner, with each party effectively owning 100% of the estate. When the first spouse passes away, their interest in the estate automatically passes to the surviving spouse without entering probate. At this point, the trust becomes irrevocable, meaning the surviving spouse cannot dispose of the estate.
For foreign, unmarried co-title holders not partnered in an LLC, the best strategy to mitigate estate tax is to take title as “joint tenants with right of survivorship.” In this case, each titleholder owns an equal percentage of the estate. Like tenancy by the entirety, when one titleholder passes away, their interest in the estate passes automatically to the survivor(s) without entering probate. But unlike tenancy by the entirety, joint tenancy with right of survivorship can be severed by one owner without a signature from the other.
As Orlando’s premier foreign buyer’s agents, the Authentic Real Estate Team knows how hard you work for your investments, and how frustrating it can be to forfeit the fruits of your labor to the IRS. We’ve helped countless clients protect their assets and heirs from exorbitant estate tax for non-citizens, and we can help you too!