International estate planning becomes more complicated when a family, business, or asset base crosses national borders. U.S. citizens and residents can face U.S. estate tax on worldwide assets, while another country may impose its own inheritance, wealth, or transfer taxes. State estate taxes can add another layer. Business structure matters too, because ownership through U.S. or foreign entities can change reporting and tax consequences. Rules historically known as Global, Intangible, Low-Taxed Inclusion (GILTI), now generally referred to as Net CFC Tested Income, may also affect owners of foreign corporations. Without coordinated planning, the same asset can create tax, reporting, and succession issues in several jurisdictions at once.
U.S. transfer-tax rules treat a non-citizen spouse differently from a U.S. citizen spouse. The unlimited marital deduction generally is not available for lifetime gifts or property passing at death. For gifts, a separate, inflation-adjusted annual exclusion may apply. At death, property can qualify for the marital deduction if it passes to a qualified domestic trust, or QDOT, that meets requirements. A QDOT trust must generally include a U.S. citizen or domestic corporate trustee with authority to withhold tax from certain principal distributions. The QDOT usually defers estate tax until taxable distributions occur or the surviving spouse dies.
A foreign grantor trust is a foreign trust whose assets are treated as owned by another person under U.S. grantor trust rules. These trusts may arise in cross-border families involving non-U.S. grantors, U.S. beneficiaries, or assets held in multiple countries, but the U.S. tax treatment depends on the specific ownership and beneficiary rules that apply. U.S. persons who transfer assets to, own an interest in, or receive distributions from a foreign trust may have reporting obligations on Form 3520, while a foreign trust with a U.S. owner generally has a Form 3520-A filing obligation. For wealth-transfer planning, valuation may also consider Discounts for Lack of Control and Marketability when valuing interests in closely held businesses or other illiquid assets transferred to or held through a trust. The availability and amount of these discounts depend on the specific ownership interest, applicable valuation rules, and facts of the transaction.
The United States has estate or gift tax treaty provisions with only a limited group of countries. An applicable estate tax treaty can change which country has the primary right to tax an asset, modify how an asset’s location is determined, or provide credits that reduce overlapping taxation. That matters when a person is connected to one country but owns property or business interests in another. Many countries, including Latin American jurisdictions, do not have U.S. estate and gift tax treaties. When no treaty applies, domestic rules and available foreign death-tax credits must be coordinated to limit double taxation.
Does US estate tax reach a citizen’s foreign assets?
Yes. A U.S. citizen is subject to estate and gift tax on worldwide gratuitous transfers, including foreign assets. The unified system combines lifetime taxable gifts and the taxable estate, then applies exclusions, deductions, credits, and the statutory rate schedule cumulatively.
Can a non-resident alien owe US estate tax at death?
Yes. A nonresident who is not a U.S. citizen can owe U.S. estate tax on U.S.-situated assets. Form 706-NA may be required when U.S.-situated assets and adjusted taxable gifts exceed the applicable filing threshold.
What does a QDOT trust do for a non-citizen spouse?
A QDOT can allow property passing to a non-citizen surviving spouse to qualify for the estate tax marital deduction. It generally defers estate tax, with tax potentially arising when principal is distributed or when the surviving spouse later dies eventually.
Must a US person report receiving a large foreign gift?
Often, yes. A U.S. person generally must file Form 3520 after receiving more than $100,000 in aggregate gifts or bequests from a nonresident alien individual or foreign estate. Different thresholds apply to gifts from foreign corporations or partnerships.
For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Jonathan Swartz, partner in Bennett Thrasher’s Trusts & Estates Planning, or call us at 770.396.2200.
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