Smart US Real State Investing: Avoiding U.S. Inheritance Tax for Non-U.S. Persons

In the world of real estate investing in the USA, there's a tax that not everyone is aware of: the inheritance tax. This tax is unique to the United States and can catch non-U.S. person investors off guard, especially if such a tax does not exist in their home countries. Let's break down what you need to know in simple terms.

Understanding the U.S. Inheritance Tax

In the United States, there is no federal "inheritance tax" per se. Instead, the country has a federal “estate tax” that applies to the estate of a deceased person. The tax is levied on the “estate” of the deceased and assessed on the overall value of the estate before distribution to heirs. The “estate” pays the tax, a probate proceeding needs to happen at a probate court, and then heirs can dispose of property.

Estate tax only applies to estates exceeding a certain threshold, which can change due to legislative updates.

For 2024, the federal estate tax threshold or exemption is $13.61 million for a U.S. person, which means estates of married couples don't have to pay estate tax if their estate is worth $27.22 million or less. For 2023, the threshold was $12.92 million for individuals and $25.84 million for married couples.

However, the estate tax threshold or exemption for foreign nationals/non-U.S. individuals is just $60,000.

As you can see, for U.S. persons, the exemption is a generous $13 million plus. However, for non-U.S. tax residents, it's a mere $60,000. Therefore, if you are a non-resident alien, you own real estate in your name in the USA, and you die, the estate tax liability could be massive.

The estate tax in the USA is a “territorial tax,” applying to most assets located in the USA when the owner passes away. Some assets are excluded from the taxable base. Real estate under your name and located in the USA is subject to estate tax.

Estate tax rates range from 32% up to 40%. The 40% tax rate applies when the taxable amount exceeds $1,000,000.

Thus, for non-U.S. resident aliens with real estate investments in the USA, exposure to estate tax can mean writing a BIG check to the IRS. This is a red flag 🚩 you need to pay attention to.

Let’s explore what happens when non-U.S. persons buy real estate in the USA under their name when they die.

Navigating the Pitfalls: Preserving Wealth for Non-U.S. Property Owners

In the realm of real estate ownership by non-U.S. individuals, the ramifications extend beyond the property itself. With a mere $60,000 tax exemption, heirs face considerable estate tax burdens. Adding to this, probate proceedings introduce attorneys and other fees, potentially entangling the property in a prolonged legal process.

Such complications may force heirs into liquidity challenges, grappling with tax obligations and expenses.

The outcome: a substantial reduction, often up to 50%, in the estate's value before reaching the hands of intended heirs.

Strategically addressing these facets becomes imperative for preserving wealth and ensuring a seamless transition of assets.

After Dealing with Taxes, The Pain is Not Over. The Probate: Your Assets will be Frozen for a While

Probate is the legal procedure through which a deceased person's estate is settled in the USA. During the legal process, the estate of a deceased person is administered by a third party.

The estate is typically administered by an individual appointed in the deceased person's will, known as the executor or personal representative. If there's no will, the court may appoint an administrator to oversee the probate process.

This process involves verifying the will, taking inventory of assets, settling debts, and distributing the remaining assets to heirs.

While heirs are not required to hire an attorney, many find it beneficial to do so, especially in complex cases. An attorney can guide them through the probate process, help navigate legal requirements, and ensure the proper distribution of assets. The cost of hiring an attorney for probate can vary, and it is generally based on factors such as the complexity of the estate and the attorney's fee structure.

In short, the probate legal process is known for its time-consuming and costly nature, often causing delays in the distribution of the deceased person's property to their heirs.

By calculating today the estate tax liability, attorney fees, and probate delays and costs, non-U.S. investors can better understand the financial impact of not investing in real estate in the USA through a blocker.

The Beauty of a Blocker Legal Entity: Safe Taxes and Expenses, and Avoid Probate Delays

Non-U.S. persons can avoid the above-mentioned complications by purchasing real estate in the USA through a blocker legal entity. This shields the property from hefty estate taxes, probate legal fees, and probate process expenses. Setting up a blocker can mean 100% legal avoidance of estate taxes and immediate control to sell the real estate when the heirs find it convenient.

Why a Blocker Works?

A blocker works because at the death of the patriarch or matriarch investor, U.S. real estate is owned by the blocker legal entity and not by a non-U.S. resident alien. Thus, there is no estate to tax in the USA.

The blocker acts as a protective barrier, and it can be established anywhere outside the USA. Jurisdictions that are not blacklisted by tax administrations of the non-U.S. individual investor country of residence are the most popular.

The Financial Impact

Setting up a blocker can mean 100% avoidance of estate taxes, legal fees, and probate expenses. Note that you will need to budget for the blocker setup, maintenance, accounting, and tax formal duties compliance.

Already Invested? No Problem, let’s Restructure the Ownership

If you've already invested directly in real estate under your name, there's still hope. Restructuring ownership through a blocker is the key to solving this puzzle. The process involves transferring the property to the foreign blocker. Coordination of the flip by your trusted advisor is recommended.

Be Aware. Restructuring the Ownership of Other Assets May Also be Required

Bear in mind that the described tax treatment for U.S. real estate investments may also apply to other types of assets located in the USA. Therefore, I strongly suggest you check this guideline prepared by Morgan Stanley, take note, and do the math to determine which other U.S. direct investments under your name should also be transferred to the blocker structure soonest.

Take Action and Sleep Well - Happy to Help

If you're a non-U.S. resident interested in investing in the USA without burdening your heirs with estate taxes, attorney fees, and probate costs and delays, or you need to restructure your existing real estate investments through a blocker, and you need someone to help you coordinate this important matter, consider reaching out.

👋 LET´S TALK

It would be a pleasure to meet you, understand your unique situation, and help you set up the team and the ideal structure to protect your investments and ensure a smooth and tax-efficient transition for your loved ones.

Invest wisely, and let's secure your legacy without unnecessary financial burdens.

Book a meeting if you could use an honest, independent, and inspiring viewpoint. Use this link to schedule a Zoom meeting in my calendar at your convenience. Schedule a Zoom meeting HERE

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Warm regards,

Marcel (Nacho) Imery NachoImery.com Consultant & Trusted Advisor HNWI | Family Office | Startup | VC Funds | Corporate Venture Funds +1 561 6176980 nacho@nachoimery.com Let's Zoom. Schedule a Zoom meeting HERE New York

DISCLAIMER

This newsletter is provided for informational purposes only and does not constitute legal advice, financial advice, or any other professional advice; and is subject to change at any time without further notice. The content is based on general principles of real estate investing, based on data from multiple sources, and may not be applicable to your specific circumstances, and Nacho Imery makes no representation as to the accuracy or completeness of data. The information in this newsletter is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Always seek the advice of a qualified professional before making any financial, legal, tax or accounting decisions. The author and publisher of this newsletter are not responsible for any actions or decisions taken based on the information provided. Readers should consult with a legal or financial professional for advice tailored to their individual needs and circumstances.