If you are married to a US Citizen this doesn't apply to you - everyone else read on!
Why Does Tax Law Treat Non-US Citizen Spouses Differently?
And besides, I live in Ireland, so why do I even have to pay US Tax if I die? Most people don't know this so please read on.
Most people just assume that they can give or leave a spouse money without any tax consequences. This is, after all, true in Ireland and transfers between spouses or civil partners are exempt from tax.
However, there is a principle in international tax call the "lex situs" from the Latin which means
"the law of the place in which property is situated for the purposes of the conflict of laws"
The "property" in this case is a share in a company listed on the New York Stock Exchange. Under international law the country where the property is domiciled, in this case the USA, has taxing rights.
So, for example, since Ireland has the right to tax a house in Dublin, the US has the right to tax a share in Google.
How are the IRS ever going to know?
Did you ever complete one of these? That's right, you have to or you will pay 30% Dividend Withholding Tax and you have to renew it every 3 years.
Note we have highlighted some of the information that would be useful in assisting the IRS to track you down.
So, we can take it as read that Uncle Sam knows you own the stock.
Ok, so what's the problem?
When it comes to estate taxes, the US Government can wait until the death of the surviving spouse to collect any taxes that may be owed. The IRS codifies this right in I.R.C. §2056 by granting an unlimited estate tax deduction to a surviving spouse.
However, the rules are different if you are married to a person who is not a US citizen. In this case (note that this is also true of UK Inheritance Tax) the US Government has no right to tax the estate of your spouse or civil partner. So, in these circumstances the amount of an estate that may be left to a spouse or civil partner is restricted where they are, what is known as, a non-resident foreign alien. This is basically the whole of the rest of the world without a US passport. So most likely you....
The amount that may be left free from tax to a NRA on death of their spouse or civil partner holding US domiciled assets is just
EVERYTHING YOU OWN IN THE USA above $60,000 is subject to Federal Estate Tax at a graduated rate of up to 40% on the death of the NRA holding US assets.
In our experience, most people do not know this, those that do often decide to ignore it. This is a big mistake.
We spoke to a Lawyer in Dublin who confirmed that most probate applications in Ireland are dealt with by a Solicitor and that therefore this is not something that can just be swept under the carpet as a Form 706 NA must be filed with the IRS by the executor of the estate within 9 months if the value of the US assets is in excess of $60,000.
There are penalties for late filing and payment of tax.
In Estate of Agnes R. Skeba v. United States, No. 17-cv-10231 PGS TJB (D.N.J. 2020), the United States District Court for the District of New Jersey, the court examined the issue of whether the taxpayer demonstrated reasonable cause for its late filing. The court cited § 6651(a), stating that
no penalty for the failure to timely file a tax return may be assessed if ‘it is shown that such failure is due to reasonable cause and not due to willful neglect.’
The IRS had previously imposed a $450,000 penalty for the late filing. Which was overturned by the court in this case as the court determined that penalties should not apply because reasonable cause existed for the late filing demonstrates that there are situations in which a taxpayer may be able avoid the penalties for late tax filings and other IRS penalties. You might not be so fortunate.
It gets worse
As we have already said, there is no tax in Ireland on the 1st death of a spouse or civil partner. Therefore under Irish Law leaving assets to the survivor does not represent a taxable inheritance.
Check your Will at this point - it says, and I paraphrase, leave everything to my spouse or civil partner if I die and then split it up among the family. Right?
So, this means that there is no Irish Tax due which can be used to credit the US Tax against.
The survivor then dies and leaves the estate to the Family and, you guessed it, Irish CAT rules apply and your estate will potentially pay another 33% tax.
Bottom line, if you have $1,000,000 in US Stock and you die.
The tax due in the USA would be $345,800 for which there would be no credit against Irish Tax if the assets are left to a spouse or Civil Partner
Thereafter, their estate will potentially be subject to Irish CAT at 33% on top of the US Tax already paid. An overall deduction of, in this case a little over 56%!
If you leave your US assets directly to your children and the inheritance is within the CAT A exemption of €335,000 (tax year 2021) then, again, there is no tax in Ireland and so nothing to set the US Tax against.
Of course we have a solution
So, we will open an account for you with our custodian bank which is Pershing Securities a $2 trillion global custody business.
Where possible, we will then arrange an "in-specie" transfer of your stock to the Irish account.
This means a re-registration of the stock without having to sell and crystalise a gain for Capital Gains Tax purposes.
If you die whilst holding US Domiciled assets we will put in place a structure after you die to allow you to obtain an unlimited spousal exemption.
If you dispose of the asset during your lifetime either by sale or gift then the problem goes away. Note that in this respect we would always counsel selling down positions in your employer's company in any event see here
However, if your estate is caught in this position you will know that you have put in place the necessary contingency plan to ensure that your spouse or civil partner will be able to avail of an unlimited exemption in the event of your death. On their death, the US Estate Taxes will be due and a credit will then be available against Irish CAT potentially resulting in some very substantial tax savings.
This service is potentially available to anyone with more than $250,000 in a US company or holding ETFs domiciled in the USA. Terms and conditions apply.
For more information, please get in touch
You may also be interested in our Tax Guide which can be found here