Overview of U.S. Estate Tax: Thresholds and Key Considerations for US citizens vs. non-US citizens
The U.S. estate tax system applies differently to U.S. citizens and non-U.S. citizens, and especially non-resident non-U.S. citizens (NRNCs), with significant variations in exemption thresholds, tax rates, and treatment of worldwide assets.
Here's a detailed breakdown:
1. Estate Tax for U.S. Citizens
Exemption Threshold:
As of 2025, the federal estate tax exemption is $13,99 million per individual (adjusted annually for inflation).
For married couples, the combined exemption amount is $27.98 million through portability (the unused exemption of the first spouse can be transferred to the surviving spouse).
Worldwide Assets:
U.S. citizens are taxed on their entire worldwide estate, regardless of where they reside or where their assets are located.
Tax Rates:
Estates exceeding the exemption threshold are taxed at rates ranging from 18% to 40% on the amount above the exemption.
Gift and Estate Tax Unified Credit:
The lifetime exemption applies to both gifts and estates. Any taxable gifts made during a person’s lifetime reduce the remaining estate tax exemption.
2. Estate Tax for Non-U.S. Citizens
Nonresident Non-U.S. Citizens (NRNCs):
Exemption Threshold:
NRNCs are taxed only on their U.S.-situs assets (assets located in or connected to the United States), with a much lower exemption of $60,000.
U.S.-situs assets include:
Real estate in the U.S.
Tangible property (e.g., artwork, jewelry) located in the U.S.
U.S. stocks (even if held in foreign brokerage accounts).
Assets like non-U.S. real estate, foreign bank accounts, and non-U.S. stocks are excluded from U.S. estate taxation.
Tax Rates:
The same progressive tax rates (18%-40%) apply to the taxable value above the $60,000 threshold.
No Portability:
NRNCs cannot use the portability provision to transfer unused exemptions to their spouse.
4. Special Rules for Non-Citizen Spouses
Unlimited Marital Deduction:
U.S. citizens can leave an unlimited amount to a U.S. citizen spouse free of estate tax.
For a non-citizen spouse, the unlimited marital deduction does not apply. Instead:
Transfers to a non-citizen spouse are subject to the estate tax, unless assets are transferred to a Qualified Domestic Trust (QDOT).
QDOT ensures the assets are taxed only when distributed to the surviving spouse or at their death.
5. Planning Strategies to Minimize U.S. Estate Tax
For U.S. Citizens:
Use the Full Exemption:
Ensure the full $13.99 million exemption is used during your lifetime or at death.
Consider gifting assets during your lifetime to reduce your taxable estate.
Portability:
Married couples should file an estate tax return for the first deceased spouse to elect portability and maximize the surviving spouse’s exemption.
Charitable Donations:
Charitable bequests reduce the taxable estate.
Life Insurance:
Consider using life insurance proceeds to cover estate tax liabilities. Life insurance owned through an Irrevocable Life Insurance Trust (ILIT) can be excluded from the taxable estate.
For Non-U.S. Citizens (NRNCs):
Avoid U.S.-Situs Assets:
Hold U.S. real estate or other U.S.-situs assets through non-U.S. entities (e.g., foreign corporations or trusts) to remove them from your U.S. estate.
Use Foreign Entities:
Investments in U.S. stocks can be structured through foreign corporations or funds to avoid estate tax exposure.
QDOT for Non-Citizen Spouses:
Use a QDOT to defer estate taxes on assets passed to a non-citizen spouse.
Leverage Tax Treaties:
Certain countries have estate tax treaties with the U.S. that provide increased exemptions or prevent double taxation.
6. Estate Tax Treaties
The U.S. has estate tax treaties with several countries, including Germany, which provide:
Relief from double taxation.
Allocation of taxing rights between the countries.
Potentially higher exemptions for NRNCs.
