Non-US citizen with US Brokers: Estate Tax risk?

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Topic Author
DXB
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Non-US citizen with US Brokers: Estate Tax risk?

Post by DXB » Fri Nov 14, 2014 12:59 pm

I am a not a US citizen and I don't live in the US, and never have.

I recently opened a trading account with Interactive Brokers (IB). The account is domiciled in the US. I use it to buy ETFs from the London and Amsterdam stock exchanges. The ETFs are all domiciled in Ireland.

My question is this: Will my IB trading account be liable for US Estate Tax in the event of my death, assuming it has a value over 60k dollars (I do not mean a cash balance of 60k; I mean a liquidation value of 60k)? I reiterate: I hold no stocks bought off a US exchange - all are bought from European exchanges.
Last edited by DXB on Fri Nov 14, 2014 5:44 pm, edited 1 time in total.

Erwin
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Re: Non-US citizen with Interactive Brokers: Estate Tax risk

Post by Erwin » Fri Nov 14, 2014 1:11 pm

Yes, unless you buy individual bonds or stocks. The way to get around it is to form a company and buy through it. Companies never die
Erwin

Erwin
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Re: Non-US citizen with Interactive Brokers: Estate Tax risk

Post by Erwin » Fri Nov 14, 2014 1:21 pm

Sorry, I did not read carefully. If your ETFs are foreign ETFs buying US individual stocks and bonds, the answer would be NO.
Erwin

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DXB
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Re: Non-US citizen with Interactive Brokers: Estate Tax risk

Post by DXB » Fri Nov 14, 2014 1:29 pm

mpt follower wrote:Yes, unless you buy individual bonds or stocks. The way to get around it is to form a company and buy through it. Companies never die
Thanks for this. I have some follow-up questions, if you don't mind.

- Do you have a link to legislation or some official source where it's clearly specified that trading accounts, such as my IB account, would be so liable?

- Given that I live abroad, how would the US government be made aware my death, other than by a next of kin telling them? Theoretically, though the account may be in "Bob's" name, Bob's wife could in practice have all the access rights. So, if poor Bob were to die, who would inform the US government or IB of Bob's death, other than Bob's wife? And what would stop Bob's wife from clearing out the account before anyone knew Bob had died?

Most probably I will use my IB account until it reaches 100k dollars and then migrate to a non-US broker, as it's a risk I don't want to take, but I am curious nonetheless about the above scenario.

Erwin
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Re: Non-US citizen with Interactive Brokers: Estate Tax risk

Post by Erwin » Fri Nov 14, 2014 2:26 pm

DXB wrote:
mpt follower wrote:Yes, unless you buy individual bonds or stocks. The way to get around it is to form a company and buy through it. Companies never die
Thanks for this. I have some follow-up questions, if you don't mind.

- Do you have a link to legislation or some official source where it's clearly specified that trading accounts, such as my IB account, would be so liable?

- Given that I live abroad, how would the US government be made aware my death, other than by a next of kin telling them? Theoretically, though the account may be in "Bob's" name, Bob's wife could in practice have all the access rights. So, if poor Bob were to die, who would inform the US government or IB of Bob's death, other than Bob's wife? And what would stop Bob's wife from clearing out the account before anyone knew Bob had died?

Most probably I will use my IB account until it reaches 100k dollars and then migrate to a non-US broker, as it's a risk I don't want to take, but I am curious nonetheless about the above scenario.
I cannot answer the first question but I live overseas and my non us citizen friends struggle with the same issue and have done things to avoid the eventuality. On your second question, I agree with you, unless someone in the investment company where you have your account reports it, I do not see an issue. Lastly, although $100,000 is a lot of money, it is not enough to worry about.
Erwin

TradingPlaces
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Re: Non-US citizen with Interactive Brokers: Estate Tax risk

Post by TradingPlaces » Fri Nov 14, 2014 3:00 pm

DXB wrote:I am a not a US citizen and I don't live in the US, and never have.

I recently opened a trading account with Interactive Brokers (IB). The account is domiciled in the US. I use it to buy ETFs from the London and Amsterdam stock exchanges. The ETFs are all domiciled in Ireland.

My question is this: Will my IB trading account be liable for US Estate Tax in the event of my death, assuming it has a value over 60k dollars (I do not mean a cash balance of 60k; I mean a liquidation value of 60k)? I reiterate: I hold no stocks bought off a US exchange - all are bought from European exchanges.
IANAL, but a few more details would be good to know:

- what is the Permanent Address on the account,
- what is the Mailing Address on the account,
- how was the account opened: where, using which means,
- who is the account holder, and how is this account holder identified. I know it is you, but how is it identified on the account: name, manner, POD, identity, etc,
- did you provide a US social security number,

And lastly, I have a very stupid question: why on earth would this account be subject to US Estate Tax? A non-US person opened a non-US account, using a non-US address, non-US identity, and traded non-US securities. It would be a real trouble for about 5.7 Billion people if in this situation, the USA wanted to Estate-tax them.

Heck, I would even go as far as to state this: a non-US person opens a US-based brokerage account, using a US-based address, and keeps everything within the law, and starts trading freely in US securities. Even in that case, one should expect to not pay US Estate Taxes. You might have to pay US-capital gains taxes, US-interest taxes, etc, but even then, there are such things as tax treaties.

A very interesting question would be, do the funds end up in probate in case of death? And if so, can IB really do the right thing?

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DXB
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Re: Non-US citizen with Interactive Brokers: Estate Tax risk

Post by DXB » Fri Nov 14, 2014 3:52 pm

@Trading Places.

Although I am non-US and have no US address or social security number, the trading account with Interactive Brokers might (or might not) be the vulnerability because it is US-domiciled. That is what I seek clarification on.

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Epsilon Delta
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Re: Non-US citizen with Interactive Brokers: Estate Tax risk

Post by Epsilon Delta » Fri Nov 14, 2014 3:54 pm

TradingPlaces wrote:
DXB wrote:I recently opened a trading account with Interactive Brokers (IB). The account is domiciled in the US.
And lastly, I have a very stupid question: why on earth would this account be subject to US Estate Tax?
The account is domiciled in the US. It's subject to US law. In many ways this is a good thing, since US law protects property rights etc, but you don't get to pick and chose which laws apply. You take the whole basket or you take your business elsewhere. This is not unique to the US, it's true of every country in the world.

Others have asked how would IB or the IRS know if the account holder dies. Generally we do not enforce laws by making it impossible to break them. We expect people to follow the law and back that up by hunting down (some) people who break laws and punishing them after the fact. In this case not paying inheritance tax is probably possible at least initially, but tax evasion intersects with money laundering and other crimes that are fairly high on the priority list of both US and foreign authorities. Not reporting the death stands a reasonable chance of coming to somebodies attention. Do you feel lucky?

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Re: Non-US citizen with Interactive Brokers: Estate Tax risk

Post by TradingPlaces » Fri Nov 14, 2014 4:12 pm

I think you need to clarify your filing status with the IRS. Furthermore, your US immigration (not tax) status would also play into this.

IMO, and IANAL, but you are:

- non-US citizen, and non-US resident for the purpose of immigration,
- non-resident for the purposes of IRS.

Thus, this would apply:

http://www.irs.gov/Individuals/Internat ... ax-Returns

There are two keys:

- US-Situated assets,
- US resident for tax purposes.

You can determine, at your own risk, how both of those apply to you.
Last edited by TradingPlaces on Fri Nov 14, 2014 4:49 pm, edited 3 times in total.

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Re: Non-US citizen with Interactive Brokers: Estate Tax risk

Post by TradingPlaces » Fri Nov 14, 2014 4:23 pm

DXB wrote: - Given that I live abroad, how would the US government be made aware my death, other than by a next of kin telling them? Theoretically, though the account may be in "Bob's" name, Bob's wife could in practice have all the access rights. So, if poor Bob were to die, who would inform the US government or IB of Bob's death, other than Bob's wife? And what would stop Bob's wife from clearing out the account before
anyone knew Bob had died?
1. The responsibility will be on the executor of the estate. Whether that is a state, local, or municipal authority in a foreign country, or a private attorney, or even a non-attorney relative, that is irrelevant,
2. Who gets the assets after death is an issue of estate, will, and possibly probate,
3. If you and your wife hold the account jointly, it would highly depend on how the account is titled: http://legal-dictionary.thefreedictiona ... +in+Common, and possibly local laws,
4. I think it will be illegal, for anyone, to clear the account, unless the law explicitly allowed ownership to pass to that person upon the co-owners death. Tax issues aside, I think that could be construed as theft, and someone could face legal issues, possibly felonies. Having a physical or digital access to an account should be possibly with a power of attorney (limited, full, etc), and power of attorney does not allow someone to steal the money upon the original owners death,

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Re: Non-US citizen with Interactive Brokers: Estate Tax risk

Post by TedSwippet » Fri Nov 14, 2014 4:24 pm

Wow, lots of misinformation and confusion in this thread.

To answer OP's initial question, no. You are neither a US citizen nor US resident, so a bona fide 'non-resident alien'. As long as you avoid holding US stocks, US bonds, US domiciled ETFs (really just another type of US stock) and other 'US situated' assets in your IB account then you should have no US estate tax worries. The fact that IB operates out of the US should not impact you. The location of the broker does not decide the location of the assets you hold.

As for "Heck, I would even go as far as to state this: a non-US person opens a US-based brokerage account, using a US-based address, and keeps everything within the law, and starts trading freely in US securities. Even in that case, one should expect to not pay US Estate Taxes." Well, yes, any reasonable person would not. But US tax law does not follow common sense. The US estate tax laws are drafted to include some US situated assets held by a deceased non-resident aliens, and kick in at remarkably low levels compared with 'homelanders'. US domiciled ETFs are one of the larger man-traps. US real estate is another, but is easier to spot. Oddly, deposits in a US bank account are not US situated, but real cash held in a safe deposit box in a US bank would be (best not look for logic in US tax law). The US has a handful of estate tax treaties, and if one covers your country then the US estate tax bite is greatly lessened. It is however wise for non-resident aliens generally to simply avoid directly holding US assets.

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Re: Non-US citizen with Interactive Brokers: Estate Tax risk

Post by TradingPlaces » Fri Nov 14, 2014 4:31 pm

TedSwippet wrote: As for "Heck, I would even go as far as to state this: a non-US person opens a US-based brokerage account, using a US-based address, and keeps everything within the law, and starts trading freely in US securities. Even in that case, one should expect to not pay US Estate Taxes."

Well, yes, any reasonable person would not. But US tax law does not follow common sense.
Point taken.

TedSwippet wrote: The US estate tax laws are drafted to include some US situated assets held by a deceased non-resident aliens, and kick in at remarkably low levels compared with 'homelanders'.
I would personally qualify that as theft. I read the IRS link, and that is precisely right. Your assets fit into US-Situated", AND you fit into "non-resident for IRS purpose", and you are essentially screwed.

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DXB
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Re: Non-US citizen with Interactive Brokers: Estate Tax risk

Post by DXB » Fri Nov 14, 2014 4:41 pm

TedSwippet wrote:Wow, lots of misinformation and confusion in this thread.

To answer OP's initial question, no. You are neither a US citizen nor US resident, so a bona fide 'non-resident alien'. As long as you avoid holding US stocks, US bonds, US domiciled ETFs (really just another type of US stock) and other 'US situated' assets in your IB account then you should have no US estate tax worries. The fact that IB operates out of the US should not impact you. The location of the broker does not decide the location of the assets you hold.

As for "Heck, I would even go as far as to state this: a non-US person opens a US-based brokerage account, using a US-based address, and keeps everything within the law, and starts trading freely in US securities. Even in that case, one should expect to not pay US Estate Taxes." Well, yes, any reasonable person would not. But US tax law does not follow common sense. The US estate tax laws are drafted to include some US situated assets held by a deceased non-resident aliens, and kick in at remarkably low levels compared with 'homelanders'. US domiciled ETFs are one of the larger man-traps. US real estate is another, but is easier to spot. Oddly, deposits in a US bank account are not US situated, but real cash held in a safe deposit box in a US bank would be (best not look for logic in US tax law). The US has a handful of estate tax treaties, and if one covers your country then the US estate tax bite is greatly lessened. It is however wise for non-resident aliens generally to simply avoid directly holding US assets.
Hi Ted, thanks for your reply.

Just to clarify: do you consider my IB account with its exclusively non-US-domiciled ETFs to be a US asset?
I would like your opinion on the following bold excerpt:
B. Estate Tax: Estates of NRA individuals are subject to U.S. estate tax only on U.S. situs assets. The tax is assessed at the same rates as for U.S. citizens, up to 35% for 2011 and 2012, but with only a $60,000 exemption (as opposed to the current exemption of $5,000,000 for a U.S. person). (I.R.C. § 2106 (b)) Worldwide debts and administration expenses may be deducted, but only in the proportion that the U.S. assets bears to the decedent's worldwide assets. The unlimited marital deduction is available; however, if the surviving spouse is not a U.S. citizen, only property left to a Qualified Domestic Trust (QDT) will qualify (see Section VIII (B) below). The charitable deduction is available only for bequests to U.S. charities.

U.S. Situs Assets for Estate Tax Purposes: The following is a partial list:

U.S. situs real property, including houses and condominiums. (Treasury Reg. §§ 20.2104-1 (a)(2); 20.21051 (a)(2))

U.S. situs tangible personal property, such as jewelry, antiques, artworks and cars, unless the items are in transit or on loan for an exhibition. (Treasury Reg. §§ 20.2104-1 (a)(2); 20.21051 (a)(2))

Shares of stock of U.S. corporations, including shares of a U.S. co-operative corporation representing a co-op apartment. (I.R.C. § 2104(a))
Shares of non-U.S. corporations are not U.S. situs property. The location of the certificate is immaterial. Mutual funds (including money market funds) organized in corporate form are U.S. situs property if incorporated in the United States.
(I.R.C. § 2104(a))
If the fund is structured as a partnership or grantor trust, the situs of the fund depends on the situs of the underlying assets of the fund.

Cash deposits with U.S. brokers, money market accounts with U.S. mutual funds and cash in U.S. safe deposit boxes are U.S. situs property. (I.R.C. § 2104 (c))

Debts of U.S. obligors. Once again, however, publicly traded bonds issued after July 18, 1984 qualify as "portfolio debt" and therefore are not subject to U.S. estate taxation. (I.R.C. § 2105 (b)(3)) Previously, only bonds with a maturity of more than 6 months qualified for the estate tax portfolio debt exemption, so that short-term Treasury bills, for example, were U.S. situs assets. However, this distinction was eliminated by the Taxpayer Relief Act of 1997, and bonds now qualify for the portfolio debt exemption regardless of maturity.
The excerpt is taken from http://www.mondaq.com/unitedstates/x/16 ... ry+Outline and suggests to me that any cash sitting in an Interactive Brokers account would be subject to Estate Tax.

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DXB
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Re: Non-US citizen with Interactive Brokers: Estate Tax risk

Post by DXB » Fri Nov 14, 2014 5:00 pm

...yet further to the above, when I actually look at Article 2104, it says nothing about brokers. Rather it refers to debt. http://www.law.cornell.edu/uscode/text/26/2104
:confused

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Re: Non-US citizen with Interactive Brokers: Estate Tax risk

Post by TedSwippet » Fri Nov 14, 2014 5:03 pm

DXB wrote:Just to clarify: do you consider my IB account with its exclusively non-US-domiciled ETFs to be a US asset?
I would like your opinion on the following bold excerpt:
...
Cash deposits with U.S. brokers, money market accounts with U.S. mutual funds and cash in U.S. safe deposit boxes are U.S. situs property. (I.R.C. § 2104 (c))

The excerpt is taken from http://www.mondaq.com/unitedstates/x/16 ... ry+Outline and suggests to me that any cash sitting in an Interactive Brokers account would be subject to Estate Tax.
Yes, I believe so. It's another of those illogical US 'situs' rules. A cash balance in a US bank is not US situs, but a cash balance in a US brokerage is. Absurdity is a primary ingredient of US tax law.

Your original question explicitly stated a liquidation value rather than a cash holding. As long as you hold non-US investments (ETFs, bonds, and so on) in it, and on buying/selling make sure you stay under $60k as a cash balance, you should be fine. Of course, for best results you should ideally hold only non-US investments in a purely non-US broker. Sometimes that's infeasible, but it's worth aiming for.

All of which leaves one wondering why the US is so keen to discourage inwards investments. And if you are wondering that, you would not be the first.

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DXB
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Re: Non-US citizen with Interactive Brokers: Estate Tax risk

Post by DXB » Fri Nov 14, 2014 5:07 pm

Thank you - my conclusion is the same as yours.
I agree - I find it amazing that foreign investors in America are treated so punitively. I would love to buy VTI for example, plus a host of other US-domiciled funds. But I daren't.

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DXB
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Re: Non-US citizen with Interactive Brokers: Estate Tax risk

Post by DXB » Fri Nov 14, 2014 5:32 pm

Epsilon Delta wrote:
Others have asked how would IB or the IRS know if the account holder dies. Generally we do not enforce laws by making it impossible to break them. We expect people to follow the law and back that up by hunting down (some) people who break laws and punishing them after the fact. In this case not paying inheritance tax is probably possible at least initially, but tax evasion intersects with money laundering and other crimes that are fairly high on the priority list of both US and foreign authorities. Not reporting the death stands a reasonable chance of coming to somebodies attention. Do you feel lucky?
Certainly not, which is why IB are going to lose my business over the next few months I'm afraid. I'm off to find a non-US broker. Unfortunately none can compare to IB for quality of service and low cost, but looks like there's nothing for it but to go elsewhere.

inchvbeam
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Re: Non-US citizen with US Brokers: Estate Tax risk?

Post by inchvbeam » Sat Nov 15, 2014 5:29 am

Hi DXB, I'm a non-US citizen that's interested in using IB as well. But bearing in mind the risks highlighted by you, I will probably be staying away from IB. May I know what alternative brokers have you considered using? Thanks.

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galeno
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Re: Non-US citizen with US Brokers: Estate Tax risk?

Post by galeno » Sat Nov 15, 2014 1:44 pm

First. Listen to TedSwippet. He knows what he's talking about.

We want our portfolio to look like this: 60% VWRD + 30% IUAG + 10% CASH.

If we use USA domiciled IB we save 0.4% annually. If we use LOM Bermuda we save 0.2% annually.

We chose LOM Bermuda. We think paying an extra 20 bps to stay out of the USA is well worth the extra cost.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

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DXB
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Re: Non-US citizen with US Brokers: Estate Tax risk?

Post by DXB » Sat Nov 15, 2014 3:14 pm

inchvbeam wrote:Hi DXB, I'm a non-US citizen that's interested in using IB as well. But bearing in mind the risks highlighted by you, I will probably be staying away from IB. May I know what alternative brokers have you considered using? Thanks.
Saxo Capital Markets - a Danish outfit. But much more expensive than IB and not as flexible, and also lacking some important Vanguard ETFs traded in London and Amsterdam.

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DXB
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Re: Non-US citizen with US Brokers: Estate Tax risk?

Post by DXB » Sat Nov 15, 2014 3:25 pm

galeno wrote:First. Listen to TedSwippet. He knows what he's talking about.

We want our portfolio to look like this: 60% VWRD + 30% IUAG + 10% CASH.

If we use USA domiciled IB we save 0.4% annually. If we use LOM Bermuda we save 0.2% annually.

We chose LOM Bermuda. We think paying an extra 20 bps to stay out of the USA is well worth the extra cost.
I've never heard of LOM, but took a quick look at their website. A few key questions:

- What is their corporate history?
- What sort of deposit / cash guarantees are in place in the event that they go bust, and who underwrites the guarantee? (IB guarantees up to 500k; Saxo guarantee up to 100,000 euro.)
- Are you able to buy VUSD (Vanguard S&P 500 USD-denominated ETF) from London Stock Exchange? Saxo will let me buy VUSA (Vanguard S&P 500 from the London and Amsterdam exchanges in GBP and EUR respectively), but not VUSD from the London exchange - this is a major drawback of Saxo for me)
- What are their minimum charges per transaction?
- Do they allow you to have multiple currency accounts?

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Re: Non-US citizen with US Brokers: Estate Tax risk?

Post by galeno » Sat Nov 15, 2014 5:52 pm

As stated in the comfort letter :

“LOM uses an international network of well known banks for the sub-custody of client assets. All client assets are held in trust on behalf of customers. Client cash and assets are segregated on LOM’s books, which are regularly reconciled and audited. Client cash and assets are not carried on LOM’s balance sheet. For an additional level of protection, free cash balances of non margin clients are further segregated daily. LOM has received a legal opinion confirming that both cash and assets held in non-margin accounts would be protected in the unlikely event of the company’s insolvency.”

Regarding custodians LOM uses Bank of Butterfield (who in turn use JP Morgan) for bonds, and Bermuda Commercial Bank (who in turn use State Street Bank) for equities.

As far as costs go, ours will be the following for this port: 60% VWRD + 30% IUAG + 10% CASH.

Year 1: ER = 0.25% + Custodial fees = 0.20% + Annual IBC fees = 0.04% + Annual commission fees = 0.45% + GBP to USD fees = 0.04% for a TER = 0.99%.

Year 2 and beyond: ER = 0.25% + Custodial fees = 0.20% + Annual IBC fees = 0.04% + Annual commission fees = 0.02% + GBP to USD fees = 0.04% for a TER = 0.55%

At LOM Bermuda all interest and dividend income comes in as GBP even though our ETFs will be denominated in USD.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

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Re: Non-US citizen with US Brokers: Estate Tax risk?

Post by inchvbeam » Sat Nov 15, 2014 7:19 pm

galeno wrote:First. Listen to TedSwippet. He knows what he's talking about.

We want our portfolio to look like this: 60% VWRD + 30% IUAG + 10% CASH.

If we use USA domiciled IB we save 0.4% annually. If we use LOM Bermuda we save 0.2% annually.

We chose LOM Bermuda. We think paying an extra 20 bps to stay out of the USA is well worth the extra cost.

Hi galeno thanks for replying.

Im seeing that 'Cash deposits with U.S. brokers, money market accounts with U.S. mutual funds and cash in U.S. safe deposit boxes are U.S. situs property. (I.R.C. § 2104 (c))' is referring to cash deposits, not securities.

Im not tax-trained but even if its rly pure hard cash sitting in IB that will be taxed, it could be trouble if one's dead and thereafter the spouse/ family had to liquidate the holdings which make it automatically eligible for estate taxation.

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galeno
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Re: Non-US citizen with US Brokers: Estate Tax risk?

Post by galeno » Sat Nov 15, 2014 7:53 pm

If a non-USA person(s) decides on using a USA domiciled broker at the very least one should use a corporate account using an IBC with nominal shares holding the assets. A trust would be even better.

Cash in a USA domiciled broker's MMF is considered US situs property. However if you buy FDIC insured CDs at a USA bank thru your USA domiciled broker ("brokered CDs") they are not.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

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in_reality
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Re: Non-US citizen with US Brokers: Estate Tax risk?

Post by in_reality » Sat Nov 15, 2014 8:37 pm

DXB wrote: - What is their corporate history?
Google "the LOM Group sec lawsuit". I see suits popping up regularly over the past 10 years.

Personally, I would view any reassurances about their security and stability as worthless but maybe I dislike pumping and dumping penny stocks more than you.

Have you looked into the possibility of heirs transferring securities in-kind? Couldn't you hold the Ireland domiciled ETFs at Interactive Brokers and have your heirs transfers the shares to a European or other such broker (thus avoiding inheritance tax on cash in a US brokerage account)? For instance, http://www.tddirectinvesting.co.uk/ allows transfers from the US.

I think the only questions about the LOM Group are 1) when will the next lawsuit be and 2) would you be involved? While it may be possible to use them as a broker without incident, I'd look for alternatives.

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Re: Non-US citizen with US Brokers: Estate Tax risk?

Post by in_reality » Sat Nov 15, 2014 8:53 pm

inchvbeam wrote: Im seeing that 'Cash deposits with U.S. brokers, money market accounts with U.S. mutual funds and cash in U.S. safe deposit boxes are U.S. situs property. (I.R.C. § 2104 (c))' is referring to cash deposits, not securities.

Im not tax-trained but even if its rly pure hard cash sitting in IB that will be taxed, it could be trouble if one's dead and thereafter the spouse/ family had to liquidate the holdings which make it automatically eligible for estate taxation.
I don't follow.

If you died on Nov. 16, 2014, then don't your heirs inherit your holdings as of Nov. 16, 2014? If you were holding Ireland domiciled ETFs (for instance), isn't that what they would inherit? Once the paperwork is done, wouldn't they then being owning Ireland domiciled ETFs? If they they liquidated, wouldn't they simply be liable for the taxes that a non-resident alien is subject to when selling?

Once the shares have been legally transferred to the new owner, I don't think a case can be made that it was cash in a brokerage account that was inherited (and thus subject to inheritance tax). I am not a tax attorney though.

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Re: Non-US citizen with US Brokers: Estate Tax risk?

Post by saver007 » Sat Nov 15, 2014 9:36 pm

IB has ongoing plan to transition certain businesses to its new IB UK carrying broker. You may want to call IB to ask if your account can be transferred to IB UKL

https://ibkb.interactivebrokers.com/article/2016

partssifu
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Re: Non-US citizen with US Brokers: Estate Tax risk?

Post by partssifu » Sat Nov 15, 2014 10:07 pm

I'd just like to clarify I'm understanding this correctly. I'm in my late 20s European currently living in Asia - I currently invest using both Interactive Brokers and TD Ameritrade in ETFs (with TD all US domiciled, IB some US domiciled, other Ireland domiciled traded on LSE). Both accounts are (only slightly!) in excess of the $60K in value.

Further down the road - I'd be better to switch out of some of the US Dom. ETFs and move them to Ireland equivalents, as those won't count towards part of the $60K figure, even if they're holding US assets - as example rather than holding VOO, holding VUSA/VUSD instead?

I know in the case of VOO, VUSA/VUSD for now would be preferable anyway due to the 15% withholding taxes rather than 30% - I'm talking purely about estate tax purposes.

inchvbeam
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Re: Non-US citizen with US Brokers: Estate Tax risk?

Post by inchvbeam » Sat Nov 15, 2014 10:11 pm

saver007 wrote:IB has ongoing plan to transition certain businesses to its new IB UK carrying broker. You may want to call IB to ask if your account can be transferred to IB UKL

https://ibkb.interactivebrokers.com/article/2016

Thanks saver007, this certaintly looks like good news:

Q: What is the product introduction plan?

A: Initially, we will begin by adding non-U.S. stock index products (i.e., futures and options having the same cash underlying as their deliverable) to the existing IBUKL product offering. This includes indices such as FTSE, CAC, Hang Seng, Nikkei & DAX, among others. A new permission titled “International Equity Indexes” will be created for these products and it will be made available to new clients as well as qualifying existing clients. Qualifying existing clients include non-US accounts having option permissions and a position or position activity over prior 12 months. These existing clients will be auto-subscribed to this permission.

Once the non-U.S. stock index products have been rolled out, we will expand eligible products in the following order: forex, additional futures and then non-U.S. stocks.


May I know if ETFs come under non-US. stock index products or non-US stocks?

partssifu
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Re: Non-US citizen with US Brokers: Estate Tax risk?

Post by partssifu » Sat Nov 15, 2014 10:18 pm

So basically we should keep US domiciled ETFs to less than $60K if using a broker such as IB - for larger amounts invest in the US through Ireland / Luxembourg etc. domiciled ETFs to avoid going over the $60K threshold.

ETFs would fall under non-us Stocks I guess, non-U.S. stock index products is referring to Futures / Options.

I'm not even 30 yet so have some time before worrying about estate tax - even if both my US broker accounts exceed the threshold (albeit slightly)

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DXB
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Re: Non-US citizen with US Brokers: Estate Tax risk?

Post by DXB » Sun Nov 16, 2014 12:37 am

@inchvbeam. In my opinion the bit you quoted is not relevant. The key question to ask is whether, after moving to IB UK, your IB account would be US-domicled or UK-domicled.

If it's UK-domiciled, the U.S. estate tax issue goes away. On the downside, you would lose the $500k deposit guarantee and be stuck with the UK's more measly guarantee of £50k.

To my knowledge, this information has been on the IB website for some time. I'll raise a ticket with them today about it.


(The ETFs themselves are not the issue as long as they are domiciled outside the U.S. All of Vanguard's ETFs that trade on the London, Amsterdam, and Swiss exchange are Ireland-domiciled.)

inchvbeam
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Re: Non-US citizen with US Brokers: Estate Tax risk?

Post by inchvbeam » Sun Nov 16, 2014 1:20 am

DXB wrote:@inchvbeam. In my opinion the bit you quoted is not relevant. The key question to ask is whether, after moving to IB UK, your IB account would be US-domicled or UK-domicled.

If it's UK-domiciled, the U.S. estate tax issue goes away. On the downside, you would lose the $500k deposit guarantee and be stuck with the UK's more measly guarantee of £50k.

To my knowledge, this information has been on the IB website for some time. I'll raise a ticket with them today about it.


(The ETFs themselves are not the issue as long as they are domiciled outside the U.S. All of Vanguard's ETFs that trade on the London, Amsterdam, and Swiss exchange are Ireland-domiciled.)
Hi DXB, Im inclined to sway towards the stance where our IB account will be UK domiciled. See IB explanation on this:

' There are several benefits for holding assets under IBUK. These benefits include the consolidation of client’s non-U.S. commodities and securities positions into a single segment, the opportunity for more favorable margin treatment through position offsets and risk based methodologies, the ability to reduce borrowing costs/increase credit interest by consolidating cash balances currently maintained in separate segments and minimizing exposure to U.S. tax reporting.'

Does anyone know whether UK has any of such US-estate law affecting non-UK investor?

Tylenol Jones
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Re: Non-US citizen with US Brokers: Estate Tax risk?

Post by Tylenol Jones » Sun Nov 16, 2014 1:35 am

Yeah, I try to stick to US-domiciled brokers because of the fees and $500K protection.

For fixed income, I buy only treasuries directly as they are estate tax exempt, and for equities, I buy only Ireland-domiciled ETFs.

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Re: Non-US citizen with US Brokers: Estate Tax risk?

Post by TedSwippet » Sun Nov 16, 2014 5:02 am

partssifu wrote:Further down the road - I'd be better to switch out of some of the US Dom. ETFs and move them to Ireland equivalents, as those won't count towards part of the $60K figure, even if they're holding US assets - as example rather than holding VOO, holding VUSA/VUSD instead?

I know in the case of VOO, VUSA/VUSD for now would be preferable anyway due to the 15% withholding taxes rather than 30% - I'm talking purely about estate tax purposes.
Yes.
partssifu wrote:So basically we should keep US domiciled ETFs to less than $60K if using a broker such as IB - for larger amounts invest in the US through Ireland / Luxembourg etc. domiciled ETFs to avoid going over the $60K threshold.
Again yes (strictly, that would be any broker and not just IB or another US based broker).

inchvbeam
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Re: Non-US citizen with US Brokers: Estate Tax risk?

Post by inchvbeam » Mon Nov 17, 2014 1:43 am

@Tedswippet, other than purchasing non-US domiciled stocks, it would also be mindful to be aware of the estate law if one purchase stocks via US-brokers.

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Re: Non-US citizen with US Brokers: Estate Tax risk?

Post by smackboy1 » Mon Nov 17, 2014 12:03 pm

DXB wrote:I am a not a US citizen and I don't live in the US, and never have.

I recently opened a trading account with Interactive Brokers (IB). The account is domiciled in the US. I use it to buy ETFs from the London and Amsterdam stock exchanges. The ETFs are all domiciled in Ireland.

My question is this: Will my IB trading account be liable for US Estate Tax in the event of my death, assuming it has a value over 60k dollars (I do not mean a cash balance of 60k; I mean a liquidation value of 60k)? I reiterate: I hold no stocks bought off a US exchange - all are bought from European exchanges.
No US estate tax liability for this set of facts.

There is a lot of questionable information on this thread, but as usual TedSwippet is accurate.

Here are some additional resources to read:

http://worthpointeinvest.com/2014/01/31 ... -citizens/

http://www.blankrome.com/index.cfm?cont ... temID=2269

Something to keep in mind: if an NRA investor uses a foreign holding company to invest in US property using US brokerages virtually all the US estate/gift tax problems disappear.
Disclaimer: nothing written here should be taken as legal advice, but I did stay at a Holiday Inn Express last night.

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DXB
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Re: Non-US citizen with US Brokers: Estate Tax risk?

Post by DXB » Mon Nov 17, 2014 12:20 pm

smackboy1 wrote:
DXB wrote:I am a not a US citizen and I don't live in the US, and never have.

I recently opened a trading account with Interactive Brokers (IB). The account is domiciled in the US. I use it to buy ETFs from the London and Amsterdam stock exchanges. The ETFs are all domiciled in Ireland.

My question is this: Will my IB trading account be liable for US Estate Tax in the event of my death, assuming it has a value over 60k dollars (I do not mean a cash balance of 60k; I mean a liquidation value of 60k)? I reiterate: I hold no stocks bought off a US exchange - all are bought from European exchanges.
No US estate tax liability for this set of facts.

There is a lot of questionable information on this thread, but as usual TedSwippet is accurate.

Here are some additional resources to read:

http://worthpointeinvest.com/2014/01/31 ... -citizens/

http://www.blankrome.com/index.cfm?cont ... temID=2269

Something to keep in mind: if an NRA investor uses a foreign holding company to invest in US property using US brokerages virtually all the US estate/gift tax problems disappear.
Just so I'm clear, are you also of the view that unless there is over 60k in cash in my IB account, there is no liability?

And if yes, would it follow, then, that upon my death if I had 1M USD invested in Ireland-domiciled ETFs, my heirs would inherit the ETFs and could then request IB to transfer the positions to a broker outside of the US?

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Re: Non-US citizen with US Brokers: Estate Tax risk?

Post by vijayvijayakv » Mon Nov 17, 2014 2:38 pm

Thanks some great information on this thread ( along with some confusion) for Estate taxes for NRA´s. I have almost 350 K invested in US based brokerage with all US stocks. Can someone point me additional information as to how NRA investor go about starting to explore foreign holding company to invest in US property using US brokerages virtually all the US estate/gift tax problems disappear ( as commented in earlier thread)

Is the opening a foreign holding company that that is within the reach of investors like me who are not super wealthy. How does one go about this? how much does this cost?

Will there be issues with this holding company if I move to USA on a temporary basis for 4-5 years on employment

My US dividends are taxed at 30% as I live in a non treaty country.

Thanks in advance

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Re: Non-US citizen with US Brokers: Estate Tax risk?

Post by smackboy1 » Mon Nov 17, 2014 3:34 pm

vijayvijayakv wrote:Is the opening a foreign holding company that that is within the reach of investors like me who are not super wealthy. How does one go about this? how much does this cost?

Will there be issues with this holding company if I move to USA on a temporary basis for 4-5 years on employment.
These questions can't really be answered adequately in this forum. It is impossible to know what the US tax law will be when you die, so any planning should take into account uncertainties. While an NRA it may be prudent just to avoid any US contacts altogether. I would highly recommend consulting a tax professional in your home country (IIRC EU?) with some knowledge of US tax. It can get very complicated and tax planning good for an NRA is probably going to be a complete disaster once that person becomes a US resident tax payer.

Using a foreign holding company while you are an NRA may not be a complete free lunch. There maybe other US tax issues e.g. income tax, branch profits tax. Also your home country may unfavorably tax the corporation. Here's some search results:

http://www.taxanalysts.com/www/features ... enDocument

http://www.bryancave.com/files/Uploads/ ... ersons.pdf

http://www.deloitte.com/assets/Dcom-Uni ... 032510.pdf

http://www.foxrothschild.com/newspubs/n ... 4294970567

HOWEVER, once you become a US resident, ownership in a foreign corporation can be huge tax problem. This would include any foreign holding company you establish and probably all non-US mutual funds/ETFs. Research under passive foreign investment company (PFIC) and controlled foreign company (CFC).

http://www.us.kpmg.com/microsite/tax/ie ... icle06.htm

I cannot stress strongly enough the need to plan for US taxes BEFORE leaving your home country and stepping foot in the US. Once within the US tax system, it can be very difficult and costly to extricate oneself.
Disclaimer: nothing written here should be taken as legal advice, but I did stay at a Holiday Inn Express last night.

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Re: Non-US citizen with US Brokers: Estate Tax risk?

Post by vijayvijayakv » Mon Nov 17, 2014 4:20 pm

Thank you so Much for your Reply S.Boy.

Very useful leads indeed. However I made an error in my query . I do not have any real estate but all my assets in US shares ( Non tangible assets) worth 350 K . As these are US situs assets, assume they also may fall under the same category as real estate? If not are there any othter alternative/easier avenues to look into?

inchvbeam
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Re: Non-US citizen with US Brokers: Estate Tax risk?

Post by inchvbeam » Tue Nov 18, 2014 12:57 am

DXB wrote:
smackboy1 wrote:
DXB wrote:I am a not a US citizen and I don't live in the US, and never have.

I recently opened a trading account with Interactive Brokers (IB). The account is domiciled in the US. I use it to buy ETFs from the London and Amsterdam stock exchanges. The ETFs are all domiciled in Ireland.

My question is this: Will my IB trading account be liable for US Estate Tax in the event of my death, assuming it has a value over 60k dollars (I do not mean a cash balance of 60k; I mean a liquidation value of 60k)? I reiterate: I hold no stocks bought off a US exchange - all are bought from European exchanges.
No US estate tax liability for this set of facts.

There is a lot of questionable information on this thread, but as usual TedSwippet is accurate.

Here are some additional resources to read:

http://worthpointeinvest.com/2014/01/31 ... -citizens/

http://www.blankrome.com/index.cfm?cont ... temID=2269

Something to keep in mind: if an NRA investor uses a foreign holding company to invest in US property using US brokerages virtually all the US estate/gift tax problems disappear.
Just so I'm clear, are you also of the view that unless there is over 60k in cash in my IB account, there is no liability?

And if yes, would it follow, then, that upon my death if I had 1M USD invested in Ireland-domiciled ETFs, my heirs would inherit the ETFs and could then request IB to transfer the positions to a broker outside of the US?
Hi DXB, I guess it would appear that this would be a sensible way to prevent being hit by the estate tax.

I'm inclined to use this method as well, but looking at related discussions in other forums, perhaps we may be thinking too much, too early given that tax laws changes are rather frequent if we are considering a long holding horizon.

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Re: Non-US citizen with US Brokers: Estate Tax risk?

Post by galeno » Mon Nov 24, 2014 3:37 pm

"Something to keep in mind: if an NRA investor uses a foreign holding company to invest in US property using US brokerages virtually all the US estate/gift tax problems disappear."

When we switched from (expensive) Bank of Bermuda to (cheaper) Schwab 15 years ago, we we told to create a "family holding corporation" in Panama.

The Panamanian IBC (international business corporation) has a corporate account with Schwab.

We are now considering forming a family trust which will own the nominal shares of the Panamanian IBC. Our attorneys and accountants are looking a using a trust from Nevis.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

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Re: Non-US citizen with US Brokers: Estate Tax risk?

Post by GuillaumeDXB » Sat Jun 27, 2015 9:06 am

Hello,

I still have my UK SIPP and plan to trade stocks and ETFs in it through a new Interactive Brokers UK account. Paperwork is underway.

Now what if one puts US stocks in the SIPP ? Because the SIPP is a pension, with a trustee in the UK. Does it not qualify in a way as being a foreign company holding the US shares (like the Ireland Domiciled ETFs ?)...

Would that not be the best way to hold US shares for us ? In a SIPP or also in a non US domiciled Trust, like in a Jersey one ?

Cheers.
Guillaume

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Re: Non-US citizen with US Brokers: Estate Tax risk?

Post by Bylo Selhi » Sun Jun 28, 2015 6:49 am

smackboy1 wrote:There is a lot of questionable information on this thread, but as usual TedSwippet is accurate.
+1 and +1
Something to keep in mind: if an NRA investor uses a foreign holding company to invest in US property using US brokerages virtually all the US estate/gift tax problems disappear.
This is the standard way Canadians use to avoid US estate tax issues. Even so there has been some discussion on FWF as to whether the IRS (with help from CRA (Canada Revenue Agency)) would "look through" such an arrangement and try to challenge it.

Note that the IRS and CRA have had an information exchange program in effect for many years. Perhaps this is unique to Canada because so many Canadian brokers operate in the US (and some like TD Ameritrade are actually owned by Canadian banks.) But regardless the global trend is for national tax authorities to exchange information in an effort to maximize their mutual revenue. Don't rely on privacy legislation in your country to stop the IRS from finding out.

And finally as for the relative oppressiveness of US estate tax levied on NRAs, keep in mind that NRAs, especially dead ones, make the best tax payers. They're such a tempting target because they can't vote, before or after, their demise. So much for No taxation without representation ;)

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Re: Non-US citizen with US Brokers: Estate Tax risk?

Post by Caduceus » Sun Jul 05, 2015 7:08 am

Here's an out-of-the-box solution and I'm curious what TedSwippet and the others think about it. It seems to me the estate tax risk can be minimized for NRAs with an accidental death insurance policy. Ordinarily, such policies (which only pay out in case of a death due to accident, but not due to sickness, and not death in general) are pretty much scams. They are very inexpensive.

But non-US citizens are not taxed on capital gains, so if the account holder falls ill, or death is not immediate, the account can always be liquidated with no tax consequences and transferred back to the home country (if this is a taxable account, and not a retirement account). If death is immediate, I am guessing accidents are a likely cause. Or one could just get a sizable amount of comprehensive life insurance (the challenge is accidental death insurance have generous term durations, whereas term life insurance gets expensive past the 60s, I guess)

In what ways does having life or accidental death insurance not mitigate the estate tax risk exposure?

[It would be simpler to avoid US-domiciled investments entirely, but if for whatever reason people need to domicile investments in the U.S., I am wondering if this might not be a partial solution.]

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Re: Non-US citizen with US Brokers: Estate Tax risk?

Post by Caduceus » Sun Jul 05, 2015 7:20 am

To answer OP's initial question, no. You are neither a US citizen nor US resident, so a bona fide 'non-resident alien'. As long as you avoid holding US stocks, US bonds, US domiciled ETFs (really just another type of US stock) and other 'US situated' assets in your IB account then you should have no US estate tax worries. The fact that IB operates out of the US should not impact you. The location of the broker does not decide the location of the assets you hold.
But isn't there a tax trap in the form of the sweep account? My understanding is that US law treats money market funds or equivalents that are held by brokers as US-situs, but not money that is held in banks. So does that mean OP's heirs have to remember to transfer non-US situs assets in-kind in the event of death?

If he sells non-US situs assets but they first get deposited in International Broker's sweep account, it becomes subject to US tax, so the fact that a broker is domiciled in the United States is quite relevant. (Or am I misunderstanding the law on this point?)

By the way, how does the IRS or anyone actually know if the account holder is dead?

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Re: Non-US citizen with US Brokers: Estate Tax risk?

Post by Bylo Selhi » Sun Jul 05, 2015 7:57 am

Caduceus wrote:By the way, how does the IRS or anyone actually know if the account holder is dead?
Many countries have entered into tax treaties and tax information exchange agreements.

The extent of this information sharing has increased in recent years, in part in reaction to anti-terrorism efforts and in part to combat tax evasion. It can only continue to increase in the future.

You can run. You can die. But you can't hide it from the tax man.

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Re: Non-US citizen with US Brokers: Estate Tax risk?

Post by TedSwippet » Sun Jul 05, 2015 1:16 pm

Caduceus wrote:If death is immediate, I am guessing accidents are a likely cause.
Stroke and heart attack appear to account for just under 30% of deaths. Accident and violence turn out to be way down the list (hence the ease and cheapness of obtaining insurance against them -- insurers are not mugs!). The chance of surviving a heart attack seems to be around 50%, and of surviving a stroke around 80%.

Clearly you'd want to move your money out of the US after you survived the first 'warning shot' here. So maybe a 10-15% chance that you kick it on the first round and don't have the opportunity to rescue your funds from the US estate tax. Good odds? Only you can decide.
Caduceus wrote:But non-US citizens are not taxed on capital gains, ...
Not by the US, but perhaps by their home country. In which case on getting a terminal diagnosis you'd have to pay local CGT to avoid US estate tax. If you'd chosen different investment vehicles -- specifically, non-US ones -- you might have escaped both of these unwanted taxes.
Caduceus wrote:If he sells non-US situs assets but they first get deposited in International Broker's sweep account, it becomes subject to US tax, so the fact that a broker is domiciled in the United States is quite relevant. (Or am I misunderstanding the law on this point?)
Clarified somewhat upthread. The OP initially asked specifically about liquidation value, not cash value.

The thing not to do is die after liquidating but before moving cash out of the broker. If you die before liquidating, and only hold non-US investments you are fine. At some point your heirs will have to liquidate and that means moving to a cash or sweep account, but at this point because you are already dead the US estate tax will be calcuated on the non-liquidated stuff, which is by design non-US. If you die after liquidating and after moving cash from the broker to a bank (either US or non) you are also fine. It's just cash in a broker on date of death that causes issues.

Ridiculous? Certainly, but that's US tax law for you.

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Re: Non-US citizen with US Brokers: Estate Tax risk?

Post by SurferD » Tue Jul 07, 2015 2:05 am

Hi All,
I must say this post is disheartening..I have just opened a US based IB account and also have started investing in Ireland domiciled ETFs like many on here and this is an added worry now. I guess the only hope is to see if eventually we can transfer our holdings to IB UK (with the associated downsides).

Hopefully we can find a solution
SurferD

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Re: Non-US citizen with US Brokers: Estate Tax risk?

Post by SurferD » Tue Jul 07, 2015 2:08 am

DXB wrote:
If it's UK-domiciled, the U.S. estate tax issue goes away. On the downside, you would lose the $500k deposit guarantee and be stuck with the UK's more measly guarantee of £50k.

To my knowledge, this information has been on the IB website for some time. I'll raise a ticket with them today about it.

(The ETFs themselves are not the issue as long as they are domiciled outside the U.S. All of Vanguard's ETFs that trade on the London, Amsterdam, and Swiss exchange are Ireland-domiciled.)
Hi DXB, did you manage to get a reply from IB? I am in the exact same position as you and would be interested in finding out what they say about transferring our US accounts to UK IB if possible,
Cheers
SurferD

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