US estate tax on a nonresident's American assets

The line is domicile, not residence

A decedent is a nonresident not a citizen if, at death, he was neither a US citizen nor domiciled in the United States. Domicile is acquired, in the words of the regulation, by living in a place, even briefly, with no definite present intention of later moving. It is not the green card test, not the substantial presence test used for income tax, and not where the tax returns were filed.

That is why the analysis cannot be lifted from an income tax file. A person can be a nonresident for income tax and a domiciliary for estate tax, and the second is what decides the exposure here.

What is taxed and what is not

Only assets situated in the United States are within the charge. The category is narrower than most holders assume, and it cuts in unexpected places.

• Taxed: US real property, tangible property physically in the United States, and shares of US corporations, however and wherever they are held.
• Not taxed: deposits in a US bank account not connected with a US business, and proceeds of life insurance on the life of the nonresident.
• The trap: shares of a US corporation are US-situs even when held through a foreign broker, in a foreign account, by a person who has never set foot in the country. A holding in a US-domiciled exchange traded fund is inside the charge. The equivalent fund domiciled in Ireland or Luxembourg is not.

Sixty thousand dollars, and the cliff behind it

The unified credit for such an estate is 13 000 dollars under IRC 2102(b)(1), which shelters exactly the first 60 000 dollars of taxable estate. The IRS states that the filing threshold of 60 000 dollars is not indexed for inflation, and it has not moved in decades.

The rate schedule of IRC 2001(c) runs from 18 to 40 per cent, but the top rate applies above one million dollars of taxable estate, so anything of size is taxed at or close to forty. A million dollars of US shares held directly, with no treaty and no deductions, produces a tentative tax of 345 800 dollars and a liability of 332 800 after the credit.

The treaty changes the arithmetic, not the exposure

IRC 2102(b)(3)(A) allows an estate to claim, where a death tax treaty so provides, a unified credit prorated by the share of the worldwide gross estate situated in the United States, in place of the flat 13 000 dollars. Switzerland is among the countries whose treaty carries such a provision. The convention was signed on 9 July 1951 and entered into force on 17 September 1952.

The effect is decisive. Take the same million dollars of US shares, held by a person domiciled in Switzerland whose worldwide estate is ten million. The pro rata credit is a tenth of the applicable credit amount, and on 2026 figures that wipes out the liability entirely. Claiming it means filing, and disclosing the worldwide estate to the IRS, which is a decision in itself for a family that has never filed anything in the United States.

The treaty is of its period and is widely described by practitioners as obsolete. It is nonetheless in force, and the credit it opens is the single largest variable in the calculation.

A surviving spouse who is not American gets no marital deduction

The unlimited marital deduction that would shelter a transfer to a spouse is denied by IRC 2056(d) where the surviving spouse is not a US citizen. Property passing to a non-citizen spouse is taxed like any other, unless it passes through a qualified domestic trust under IRC 2056A.

For a couple who are both foreign nationals, with a joint brokerage account holding US shares, this means the first death is a taxable event on the deceased's share, and the survivor discovers the QDOT question at the worst moment to be learning it.

Filing, and the certificate that unlocks the assets

Form 706-NA is due where the US-situs assets, together with the gift tax specific exemption and adjusted taxable gifts, exceed 60 000 dollars. The deadline is nine months from death, with a six-month extension available on Form 4768.

The practical obstacle comes afterwards. The IRS issues a transfer certificate once the tax has been discharged or provided for, and US transfer agents, title companies and custodians generally will not release the assets without it. The certificate is not required for property administered by an executor appointed and acting within the United States. Estates should expect the process to run long: the heirs cannot reach the assets in the meantime.