This article outlines the surprising liability of non-US nationals to estate tax on any US shares they own, on death.

Target Audience

Singapore-based expats, specifically:

• Anyone who is not a US citizen, and is not US-domiciled **, owning shares of US-listed companies worth > US$60,000

** US-domicile: a person is considered to be domiciled in the US for estate and gift tax purposes if he or she lives in the US and has no present intention of leaving.

The High-Level Problem

As the rather depressing saying goes:

“nothing is certain in life, but death and taxes”.

The combination of these two unfortunate events is a tax payable, upon death, known as “estate” tax.

One surprising, but common, way in which a non-American can become liable to a (up to 40%) US estate tax liability is by owning US-listed shares above the value of US$60,000; a pitfall that many executives will unwittingly have fallen into while working for a US-listed company. Some relief from this pitfall exists for nationals of countries with which the US has estate tax treaties in place, as these may reduce or eliminate the liability. However, for non-Americans from countries for which no such treaties exist, there is a full, unresolved risk to consider.

By comparison with the US$60,000 level for non-Americans, an American citizen enjoys a rather more generous estate tax threshold of US$10,000,000 (as at 2018, and subsequently indexed for inflation).

This unpleasant tax liability for non-American shareholders is further compounded by a requirement to settle US estate tax within 9 months of death, possibly necessitating a fire sale of assets, by grieving dependents, to settle the liability.

A Simple Example

• Michelle, a Korean national, owns US$1,000,000 of Microsoft shares. On her death, the US estate tax liability for her dependents to settle is: 40% x US$940,000 (i.e. the value of her holding in excess of the US$60,000 threshold) = US$376,000

Two Possible Solutions

Other than the obvious solutions of “not dying” and/or taking on American citizenship/domicile and/or reducing US-listed shareholdings to be under the US$60,000 threshold, two potential methods of mitigating this risk are to:

1. Take out a Life insurance policy to cover the expected tax liability in case of death e.g. to pay out US$376,000 in Michelle’s case, above.
2. Initiate an “offshore portfolio bond” investment platform and transferring the shareholding into that structure, effectively abstracting ownership (the platform provider becoming the legal “owner” of the shares).

Of the two approaches, the second offers more flexibility compared with the first (which can only cover the US$ liability as it currently stands; one which may grow as the shareholding value changes). Moving the shares into an offshore portfolio bond offers the following benefits:

1. The shareholding can be maintained at whatever level the client prefers, unaffected by any “estate tax threshold” concerns.
2. In case of the death of the client (who is connected as “life assured” on the portfolio bond), no estate tax liability is triggered, as the legal “owner” (the platform provider) has not died.
3. With the estate tax risk mitigated, an unhurried discussion can then occur with a Financial Advisor regarding the concentration risk of a large single shareholding, as an outsized proportion of net worth. A client may subsequently decide to sell a portion of the shareholding and either withdraw cash proceeds, or diversify into other funds/shares to be held within the portfolio bond.

Conclusion

Few people enjoy paying tax, and even fewer, dying. If the risk of leaving your dependents with a unexpectedly large tax bill from the IRS can be easily mitigated, then this is worth exploring.

If you or any of your colleagues/friends might benefit from a discussion on this topic, then do please reach out.

Michael Davidson is a Singapore-trained and qualified Financial Adviser with Global Financial Consultants Pte Ltd providing specialist financial advice and portfolio management services to international and local professionals in Singapore.

Book a complimentary consultation here.  Please quote reference “617IHT”.

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*Please note that Michael Davidson is not a tax specialist or accountant and that none of the content outlined here should be taken as personal advice. You should consult your tax specialist and financial adviser to review your current financial situation and futures goals to consider whether this strategy is appropriate for you.  I expressly disclaim all and any liability to any person or organisation, in respect of anything, and of the consequences of anything done or omitted to be done by any such person in reliance, whether whole or in part, upon the whole or any part of the contents of this article.