Every year an increasing number of global families come to the U.S. for business or pleasure. And investing in real property in places like Miami and New York is not uncommon. Also, it’s not uncommon to bring personal effects—such as jewelry, artwork, furniture, etc.—and leave them in one’s vacation homes. However, what happens when the foreign individual suddenly dies; are these personal effects included in the gross estate of a foreign individual and subject to estate taxes? How about making a gift of valuable artwork that is physically located in the U.S.? In these situations, a foreign individual will be subject to U.S. estate and gift tax.

Generally, foreign individuals know the consequence of becoming a U.S. domiciliary—subject to U.S. estate and gift taxation on their worldwide assets—and engage in careful planning to avoid that consequence. However, many times this planning does not include their valuable personal assets, such as their artwork physically located in the U.S. The issue may arise inadvertently when a foreign individual brings his beautiful Picasso or Rothko, or artwork from more contemporary artist like Mark Bradford or Ruffino Tamayo, for the delight of his friends for a short period of time. Other reasons to bring artwork to the U.S. may include cleaning or restoring pieces of art collections. Despite the reasons, bringing artwork to the U.S. may cause estate and gift tax consequences in the U.S.

The Internal Revenue Code states that a foreign individual—non-U.S. citizen and non-domiciliary—will be subject to estate taxes on the value of personal property which at the time of his death is situated in the U.S. In that case, the foreign individual will only be allowed a $60,000 tax exemption, an amount that can be easily surpassed by the value of some pieces of artwork. So, estate taxes on the value of artwork may become a serious concern for foreign individuals, especially considering the current art market trends. In addition, if the foreign individual makes a gift of artwork that is physically located in the U.S., he/she will be subject to gift taxes.

Yet, some exceptions may apply. For instance, a foreign individual that brings or loans pieces of his art collection to the U.S. for exhibition purposes in a public gallery or museum will not be subject to estate taxes if he suddenly dies. Similarly, this exception will apply if the artwork is on its way to or from an exhibition in such a public gallery or museum. However, foreign individuals must be very careful when applying this exception. The rules require that the artwork is present in the U.S. solely for exhibition purposes in a public gallery or museum.  Here, the size of the public gallery or museum does not matter, as long as it is a public one. Unfortunately, bringing artwork to the U.S. for cleaning or restoration will not qualify under the exception.

In summary, before bringing pieces of your art collection to the U.S., a foreign individual should be aware that the physical location of tangible personal property matters when determining a foreign individual’s exposure to estate or gift taxes in the U.S. In addition, they should consider engaging in planning that includes having a trust or corporation owning the art to avoid estate and gift tax consequences.