U.S. Estate Taxation for Expats & Non-Resident Aliens

The U.S. imposes a tax on the transfer of wealth at death, but the rules differ dramatically. U.S. citizens and expats face tax on their worldwide assets with a large exemption, while non-resident aliens are taxed only on U.S.-situs assets with a minimal $60,000 exemption. Understanding these distinctions, the upcoming TCJA sunset, and the role of tax treaties is crucial for effective cross-border estate planning.

What Is U.S. Estate Tax?

The U.S. federal estate tax is a tax imposed on the transfer of a person's assets to their heirs and beneficiaries after death. It is calculated on the "taxable estate," which is the decedent's gross estate less certain allowable deductions. This tax is unified with the U.S. gift tax, meaning taxable gifts made during your lifetime can reduce the amount you can pass on tax-free at death. The tax rates are progressive, currently topping out at a steep 40%. Additionally, the Generation-Skipping Transfer (GST) tax applies to transfers skipping a generation (e.g., to grandchildren), with its own $13,990,000 exemption in 2025 for U.S. persons, aligned with the estate tax exemption.

Who Is Subject to U.S. Estate Tax?

The application of the U.S. estate tax hinges entirely on the decedent's status as either a "U.S. person" or a "non-resident alien" (NRA). This distinction is the single most important factor in international estate planning.

• U.S. Citizens and Domiciliaries (Expats): If you are a U.S. citizen (regardless of where you live) or a non-citizen who is "domiciled" in the U.S., your estate is subject to tax on its worldwide assets. This includes foreign real estate, bank accounts, and investments.
• Non-Resident Aliens (NRAs): If you are not a U.S. citizen and are not domiciled in the U.S., your estate is only subject to tax on assets that are considered "U.S. situs."

Determining Domicile

Domicile is a subjective legal concept based on intent, which makes it far more complex than the residency tests for income tax (like the Substantial Presence Test). The IRS considers multiple factors to determine if a person intended to make the U.S. their permanent home:

• Declarations of intent (e.g., in wills or visa applications).
• Location of family, social, and religious connections.
• Location of business interests and property.
• Driver's license, voting registration, and tax filings.

An expat green card holder could easily be considered U.S. domiciled, subjecting their global estate to U.S. tax. This is a critical area for professional review.

Lifetime Exemption & The 2025 Sunset

The lifetime exemption is the amount an individual can transfer during life and at death without incurring gift or estate tax. For U.S. persons, this is unified with the gift tax exemption. A separate annual gift tax exclusion allows U.S. persons to give up to $19,000 per recipient in 2025 without using any of their lifetime exemption.

Taxpayer Status	2025 Lifetime Estate Tax Exemption	Applicable Assets
U.S. Citizen / Domiciliary	$13,990,000	Worldwide Assets
Non-Resident Alien (NRA)	$60,000	U.S. Situs Assets Only

For married U.S. couples, "portability" allows the surviving spouse to use the deceased spouse's unused exemption (known as the Deceased Spousal Unused Exclusion, or DSUE). This requires a timely filing of Form 706 for the first spouse's estate, even if no tax is due, potentially doubling the available exemption to nearly $28 million in 2025.

Warning: The TCJA Sunset Looms

Note: The current high exemption for U.S. persons, established by the Tax Cuts and Jobs Act (TCJA), is scheduled to be cut in half after December 31, 2025. Unless Congress acts, the exemption will revert to its pre-TCJA level, estimated to be around $7 million in 2026 after inflation adjustments. This makes 2025 a critical year for high-net-worth individuals to consider significant gifting strategies to lock in the current high exemption.

Marital Deduction: Special Rules for Spouses

For married couples, the marital deduction can defer or eliminate estate tax, but the rules are strict and depend on the surviving spouse's citizenship.

• U.S. Citizen Surviving Spouse: The decedent's estate generally receives an unlimited marital deduction for assets passing to a U.S. citizen spouse, deferring any estate tax until the second spouse's death.
• Non-U.S. Citizen Surviving Spouse: The unlimited marital deduction is NOT available for transfers to a non-citizen spouse. To defer the tax, assets must pass to a special trust called a Qualified Domestic Trust (QDOT). A QDOT must have at least one U.S. trustee, and any distributions of principal (but not income) are subject to estate tax.

Spouse Status	Marital Deduction Availability	Key Requirements
U.S. Citizen Spouse	Unlimited	Outright transfer or qualified trust.
Non-Citizen Spouse	Unlimited (deferred via QDOT)	QDOT setup, U.S. trustee, tax on principal distributions.
NRA (No Treaty)	None	N/A

U.S. Situs Assets: The Key for NRAs

For an NRA, identifying which assets are "U.S. situs" is paramount. Proper planning involves structuring ownership to minimize these assets. While not exhaustive, the following table outlines common examples.

Considered U.S. Situs (Subject to Estate Tax)	NOT Considered U.S. Situs (Exempt from Estate Tax)
Real estate located in the U.S. (e.g., Florida condo).	Real estate located outside the U.S.
Tangible personal property in the U.S. (e.g., art, cars).	Life insurance proceeds from a U.S. insurer.
Stock in U.S. corporations (e.g., shares of Apple, Tesla), regardless of where certificates are held.	Stock in foreign corporations, even if they hold U.S. assets.
Interests in U.S. partnerships or LLCs.	Deposits in U.S. banks that are not connected with a U.S. trade or business.
Debt obligations of a U.S. person, the U.S. government, or a U.S. corporation.	Certain U.S. government and corporate bonds that qualify for the "portfolio debt exemption."

The Impact of Estate Tax Treaties

The U.S. maintains estate and/or gift tax treaties with a number of countries, including Germany, the United Kingdom, France, and Australia. These treaties can override the standard U.S. tax rules and are essential for any cross-border analysis. A treaty might provide a more favorable exemption, re-classify the situs of certain assets, or provide a credit to prevent double taxation. Always check if a treaty applies to your situation.

Filing, Planning, and Other Considerations

If an estate tax return is required, it must be filed within nine months of the date of death, though a six-month extension is available.

Filing Forms:

• Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return: Filed for the estates of U.S. citizens and domiciliaries.
• Form 706-NA, United States Estate (and Generation-Skipping Transfer) Tax Return: Filed for the estates of non-resident aliens who owned U.S. situs assets.

State Taxes

In addition to federal rules, several states impose their own estate or inheritance taxes with much lower exemptions (e.g., $6.94 million in New York for 2025). Expats and NRAs with U.S. situs assets in these states must consider this extra layer of tax. State domicile rules can also be complex for former residents.

Common Planning Strategies

• For U.S. Expats: Utilize annual gifting, make direct tuition/medical payments, and use trusts (like Irrevocable Life Insurance Trusts) to remove assets from the estate. Consider accelerating gifts in 2025 before the exemption drops.
• For NRAs: The primary goal is to avoid holding U.S. situs assets directly. This can often be achieved by holding U.S. real estate or stocks through a foreign corporation ("blocker corporation") or using certain irrevocable trusts. Warning: These structures have trade-offs. Using a foreign corporation can avoid estate tax but may trigger complex income tax issues under the CFC or PFIC rules. Holistic planning is essential.

Helpful Resources

• IRS Publication 559: Survivors, Executors, and Administrators
• About Form 706 (U.S. Citizens/Residents)
• About Form 706-NA (Non-Resident Aliens)
• U.S. Estate and Gift Tax Treaties

Take Control of Your Legacy

U.S. estate tax law is a minefield for the unprepared, particularly for cross-border families and investors. With the exemption set to decrease dramatically after 2025, proactive planning is no longer a luxury—it's a necessity. For NRAs, the low $60,000 exemption on U.S. assets can lead to disastrous and unexpected tax bills without proper structuring.

At [Your Expat CPA Firm Name], we specialize in navigating these rules. From treaty analysis to QDOT planning and strategic ownership structures, we help you protect your assets and ensure your legacy passes to your loved ones as intended.