What Every Foreign Investor Should Know About Owning U.S. Stock (2024)

• December 7, 2023

U.S. stock is a popular investment for U.S. citizens and foreigners alike. There is no citizenship requirement for owning U.S. stock and foreigners can easily access U.S. stock through U.S.-based brokers and international brokers. Despite its popularity among foreign investors, many foreigners haven’t properly planned for the U.S. estate tax consequences of owning U.S. stock. Other foreign investors are aware of the U.S. estate tax, but incorrectly assume the U.S. will not be able to enforce it.

Who is a U.S. Person

The first step to planning for U.S. estate tax is to determine whether the taxpayer is a U.S. person or non-U.S. person for estate tax purposes. In short, a U.S. person is a U.S. citizen or a U.S. domiciliary and everyone else is a non-U.S. person. For more detail on making this determination see our previous blog, https://honemaxwell.com/who-is-a-u-s-person-estate-tax-vs-income-tax/.

U.S. Estate Tax for Non-U.S. Persons

For non-U.S. persons, the estate tax only applies to U.S. assets. U.S. assets include U.S. real estate, tangible property in the U.S., physical currency located in the U.S., and stock issued by U.S. companies. A non-U.S. person is subject to an estate tax of up to 40%. Each non-U.S. person has an exemption amount of $60,000 meaning the first $60,000 of their U.S. assets may be transferred tax free to their beneficiaries. This exemption amount may be increased by an applicable U.S. tax treaty; however the U.S. does not have an extensive estate and gift tax treaty network as it does with income taxes.

Enforcement

We are often asked how the Internal Revenue Service (IRS) will know that the assets have been transferred. One common way the IRS will find out is through a transfer certificate. Many financial institutions require beneficiaries to obtain a transfer certificate before they will release the assets of the estate to the beneficiaries. A transfer certificate is issued by the IRS and will only be issued when the IRS is convinced that the estate tax has been fully satisfied. If the value of the U.S. assets exceeds $60,000 a Form 706-NA (estate tax return) must be filed before the IRS will issue a transfer certificate. In many cases, the financial institution may also ask for a copy of the 706-NA.

Planning

Some might be tempted to game the system by having someone log into their brokerage account when they die to sell all the U.S. stock they own. This is extremely risky and is not a viable estate plan. Those involved are at risk of civil fraud penalties and potentially criminal liability. It would also be relatively easy for the financial institution and regulators to discover the fraud because the transfer will have occurred after the time of death on the death certificate. Additionally, it will raise red flags when all the stock has been sold on the date of death. However, there are viable planning options.

One easy method of avoiding U.S. estate tax on U.S. stock is divestment during the owner’s lifetime. However, the divestment must take place during the owner’s lifetime because the U.S. stock is not taxed as a gift, only as an inheritance. Additionally, foreigners may consider accessing U.S. stock through non-U.S. investments such as non-U.S. mutual funds or non-U.S. ETFs. Non-U.S. persons may also choose to own the U.S. stock through a foreign corporation or foreign trust structure. If done correctly, the owner’s shares of the U.S. stock can pass to their heirs with no U.S. estate tax.

Planning for the U.S. estate tax is essential for all non-U.S. persons who own U.S. assets. The U.S. estate tax of 40% can significantly impact wealth transfer between generations, so proper planning is essential. Planning requires an analysis of many factors such as U.S. income taxes, taxes in the home country, creditor protection, legal compliance, and administrative costs.

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