Welcome to “Lost in Translation: Blunders in International Estate Planning.” This blog series explores the rarified world of international estate planning, uncovering potential pitfalls and providing insights to navigate the complexities.

Blunder No. 4:  Leaving the United States? Take your Assets with You

When U.S. or non-U.S. citizens who may have spent time working or residing in the U.S. decide to return to their home countries or any other country outside the U.S., failing to transfer their assets outside the U.S. could lead to expensive procedures for their estate beneficiaries. 

Understanding the U.S. Federal Estate Tax:

The United States imposes a federal estate tax upon death, with the top rate set at 40%. Fortunately for U.S. citizens and noncitizens domiciled in the U.S., there is a generous U.S. exclusion from the estate tax. In 2024, individuals have a $13.61 million exclusion, while married couples enjoy a $27.22 million exclusion. In contrast, nonresident noncitizens of the U.S. who own U.S. property have an exclusion of $60,000, or $120,000 for married couples. Occasionally, an estate tax treaty between the United States and a client’s home country may expand this $60,000 exclusion.  

Who Must Pay the Estate Tax?

If the estate of a U.S. or non-U.S. citizen owes estate tax, the estate is generally liable for the estate tax. However, the estate may not have sufficient liquid cash. Or the Internal Revenue Service may be unable to access liquid assets outside the United States. The Internal Revenue Service has other recourse. An executor may be held personally liable for the estate tax if the executor has already distributed estate funds to the beneficiaries. Beneficiaries of the estate who have received distributions from the estate can be personally liable for the estate tax. 

Surprisingly, a United States bank, investment manager, mutual fund, or cooperative apartment house that gives estate property to the estate beneficiaries may be liable for the estate tax. Even if the decedent signed a transfer-on-death or beneficiary designation, or if the account or property is in joint names, if they give the property to the beneficiary before paying the estate tax, the IRS can impose the estate tax on the bank, the investment manager, or co-op apartment corporation.

In addition, anyone who purchases U.S. real estate owned by a non-U.S. resident should be certain there is no U.S. or state estate tax lien on the property. An estate tax lien can remain attached to the property, and a title company may refuse to insure the title to the property.

This problem arises with non-U.S. citizens who have worked or resided in the U.S. for a time and return to their home country. The issue will also be relevant to U.S. citizens who decide to retire and live outside the U.S. 

What can a United States Bank, Investment Manager, Apartment, or Real Estate Manager Require to Distribute Estate Property and Funds to the Beneficiaries?

It may be years before a decedent’s estate tax is settled and the IRS issues a closing letter to confirm that all U.S. estate tax has been paid. However, the estate beneficiaries may want or need their inheritance as soon as possible. 

There are a few ways that a bank, investment manager, or property manager can distribute estate property to beneficiaries and limit the institution’s liability for the estate tax. 

1. Local Executor or Estate Administrator: Financial and property institutions may require the estate to petition a local probate court for the appointment of a U.S. Executor or Estate Administrator. The banks, investment, and property managers may distribute estate funds to the U.S. Executor or Estate Administrator. These entities can then distribute estate funds to the appointed Executor or Estate Administrator, who assumes any liability for the estate tax. However, financial institutions generally will not release estate funds to an Executor or Estate Administrator appointed by a court outside the United States. In such cases, the foreign Executor or Estate Administrator would need to initiate an Ancillary Court proceeding in the United States and be appointed the U.S. estate fiduciary by a U.S. court.
2. IRS Transfer Certificate: An alternative to a U.S. Court proceeding is for the estate to apply for an IRS “Transfer Certificate.” This is a lengthy procedure that requires preparing a United States estate tax return and settling any estate tax that is due. Both U.S. citizens and non-U.S. citizens residing outside the United States may require a Transfer Certificate for their estates.

Each of the abovementioned procedures may also be available to a real estate manager, such as a cooperative apartment house or a condominium association. They can require the Court appointment of a local Executor or Estate Administrator, an IRS Transfer Certificate, and a Release of any State Estate Tax Lien. They all have some level of discretion. Banks, investment managers, co-op apartment houses, and real estate managers may require only a local Executor or a Transfer Certificate. Alternatively, they could potentially require everything: a Federal Transfer Certificate, State Release of Lien, and a Court-appointed U.S. Executor or Estate Administrator. 

The result can lead to a total stalemate and paralysis. A bank might refuse to release any funds without an IRS Transfer Certificate, while the IRS may withhold issuing the Transfer Certificate until the estate settles the Federal estate tax. However, the bank could be holding the only cash available to pay the estate tax.        

So, what is the blunder?

When either a U.S. or a non-U.S. citizen decides to leave the United States, they often want to retain the safety of the United States banks, the expertise of the U.S. investment managers, or a U.S. home. However, in such cases, the estate heirs will have to pay extensive legal fees to release the estate funds and any U.S. real estate owned by the deceased. 

How to get your money to your beneficiaries: 

If a U.S. or non-U.S. citizen decides to leave the United States and wishes for their heirs to receive their inheritance in a timely manner with minimal legal fees, they should consider transferring their assets to a bank or investment manager outside the United States. U.S. Social Security benefits can be deposited in banks located outside of the U.S. If they want to spend holidays or vacations in the U.S., they must seek alternatives to owning cooperative apartments, condominiums, or houses in the U.S. Contact Diane Roskies today to explore your international estate planning needs and secure your family’s financial future.