Many individuals who live outside of the U.S. like to purchase real estate in America or invest in the U.S. Stock Market. It can be much safer than in investing in other parts of the world and often times the individual has children who have moved to America to live or study. South Florida is particularly attractive locations for foreigners to buy vacation homes or rental properties.
From a tax perspective, Florida is relatively easy to deal with as there is no state inheritance or estate tax. The transfer taxes are small and the process is pretty quick if you need to transfer the property during your lifetime. Everyone pretty much knows about the FIRPTA withholding and it is a relatively simple process to circumvent if dealt with in advance.
On death, it is a different story. First, Florida can be a royal nightmare and everyone should do the planning to avoid probate. Probate is the process of transferring assets on death and is typically quite time consuming and expensive. It is also very easy to avoid by setting up a simple trust that is invisible for tax purposes.
A foreign investor must worry about both income taxes AND estate taxes. While owning stock or real estate outright may be easiest and perhaps even best to minimize income taxes, it can be the worst thing to do for estate taxes.
The United States is not very friendly when it comes to foreign individuals who wish to transfer property upon death in America. While a US citizen or resident alien may transfer $5,430,000 (in 2015) before there is a gift or estate tax, the threshold for non-resident is $14,000 for gifts (per person per year) and only $60,000 (total) on death. A person may gift $145,000 (annually indexed for inflation) to a non-citizen spouse before there is a US gift tax.
For transfers in excess of the limits above, there is up to a 40% tax depending upon the amount of the transfer. You can defer the tax on a transfer to a spouse by setting up a Qualified Domestic Trust (“QDOT”).
Additionally, the rules are very complicated because some assets are taxed on death or gift and some assets are not. The general rule is that if something can be considered a U.S. Situs asset, it is subject to the US Federal Estate Tax when the owner dies.
Examples of U.S. Situs assets include:
- real estate located in the U.S.,
- cash or jewelry in the U.S.,
- ownership in a US based REIT, and
- ownership of a US based Annuity
Examples of Non-U.S. Situs assets include:
- real estate in foreign countries ,
- stock in foreign corporations,
- Less obviously, this also includes life insurance, and
- debt obligations (such as bonds)
This is further confused by the fact that some assets considered non-U.S. situs for gift tax purposes differ from the assets that are non-U.S. situs for estate tax purposes. Specifically, intangible property such as stock in a U.S. corporation or an interest in a US partnership or limited liability company are considered U.S. Situs assets for the estate tax, but not the gift tax. Additionally, cash on deposit in a checking or savings account at a U.S. Banking institution is a U.S. situs asset for gift tax purposes, but not for estate tax purposes.
To restate this another way, a gift in excess of $14,000 of cash on deposit in a U.S. bank is subject to a gift tax. However, regardless how much cash is there when you pass away, it is not subject to the U.S. Estate tax. Conversely, a gift of U.S. stock (regardless of how much), is not subject to the U.S. Gift Tax, but if you die owning the stock, anything in excess of $60,000 is subject to the estate tax. A money market account is treated as an intangible asset so it is considered a U.S. Situs asset for estate tax purposes, but not gift tax purposes.
As you can see, the rules are tricky, but if you are a non-resident, non US citizen who owns stock and real estate in the United States, you have options to alleviate these concerns so please confer with a competent estate planning attorney before buying any assets in America.