The 40% Death Tax on US Shares

Protecting Your Assets

This blog highlights one of the biggest risks of investing in US situs assets, Estate Tax.

The strong long-term performance of the US economy has meant that owning shares in US companies is one of the most popular and recognised investment strategies.

When non-resident aliens (NRAs) invest in US assets including shares, it is crucial they have an understanding of US estate taxes, this blog explains why.

READ MORE: The Dangers of Living in a Tax-Free Country

READ MORE: Offshore Accounts: The Easiest Way to Protect Your Wealth

US Shares

US shares can be acquired in a variety of different ways. The majority of people purchase shares through either a broker or trading platform. However, there are other means of acquisition, for example, some companies give their employees shares as part of their bonus system.

A graph showing assets which are considered US ‘situs’ and which are not.

Depending on where you live, you may be liable to pay certain taxes as a result of holding shares. These taxes may include Dividend or Capital Gains Tax, as is the case in the United Kingdom. Tax laws vary in every country, so it is important you are up to date with the laws where you are resident. Please contact your financial adviser if you are unsure about the tax laws relating to holding US shares.

Estate Tax on US shares and other US situs assets

One tax which applies irrespective of where you live, is US Estate Tax. If an investment in US shares or other US situs assets is not structured properly and the amount exceeds $60,000, the Internal Revenue Service (IRS) can take up to 40% of the fair market value of the NRA’s investment at the time of death in Estate Tax.

Many NRAs are not aware of or informed about the US estate tax exposure on all investments on directly held US securities. Holding US shares through a revocable trust, revocable foundation, or a US limited liability company (LLC) may not protect the NRA from the 40% exposure.

As a result, the NRA’s surviving family is often surprised by the application of the US Estate Tax to the NRA family’s investment in US securities (and other deemed US-situs assets, e.g., US real estate), which results in a high administrative and US tax burden for the heirs.

How can this be avoided?

One way NRA’s can mitigate this risk is by placing US situs assets into an offshore portfolio bond.

What is an offshore portfolio bond?

An offshore portfolio bond is an investment wrapper that can be used as an investment vehicle to control when you pay tax, how much you pay and whom you pay it to.

An offshore portfolio bond is a wrapper set up by a life insurance company and domiciled in a jurisdiction with a favourable tax regime, such as the Isle of Man or Guernsey.

Why a portfolio bond can protect your US situs assets from US estate tax

When US situs shares are held within a bond, because the legal owner is not the policyholder, the policyholder does not own US assets. As such, at the point of death, the assets are not liable estate tax.

deVere Acuma assist clients in placing assets into offshore portfolio bonds. If you would like to learn more information about how you can protect your assets using an offshore portfolio bond, please click on this link.

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