EU investor: any way to avoid punitive US estate tax on death?

For investors outside the US. Personal investments, personal finance, investing news and theory.
Sister forums: Canada, Spain (en español)
---------------
Post Reply
Topic Author
DJN
Posts: 211
Joined: Mon Nov 20, 2017 12:30 am

EU investor: any way to avoid punitive US estate tax on death?

Post by DJN » Mon Feb 11, 2019 3:49 am

Hi,
I will soon relinquish expat status and have to suffer EU taxes on my investments. In my case one alternative is to buy US funds while I remain outside the EU and then retain when in the EU. The principle drawback to this is the Estate Tax conundrum: Countries with no US tax treaty or a bad one (my current and future position) experience punitive taxes on all US domiciled investments valued above $60,000 at death. I believe that this can be addressed by setting up my investment account as a Joint Tenancy Account with my spouse as the joint tenant of the account (Interactive Brokers have this facility). In this case as I understand the position, on the death of one of the two joint tenancy account holders the assets in the account transfer to the other joint account holder without any need for probate and therefore avoids the dreaded US estate tax.
I assume also therefore that the surviving tenant (now sole account holder) should ASAP transfer the US funds to a UCITS (or a non regulated UK Investment Trust) to avoid US probate when they in turn die so as to avoid the punitive US estate taxes.
I would appreciate any insights and comments please.
For simplicity I would look to invest in a two fund folio of:
- VT (Vanguard total world stock including EM)
- BNDW (Vanguard total world investment grade bonds)
thanks,
DJN
Last edited by DJN on Fri Feb 15, 2019 1:22 am, edited 3 times in total.

Topic Author
DJN
Posts: 211
Joined: Mon Nov 20, 2017 12:30 am

Re: EU investor: any way to avoid US estate tax when you die?

Post by DJN » Mon Feb 11, 2019 8:37 am

Help needed! Someone out there must have faced this issue? The implication of $60,000 low threshold on the amount that avoids US estate tax is miniscule!

User avatar
BeBH65
Posts: 1313
Joined: Sat Jul 04, 2015 7:28 am

Re: EU investor: any way to avoid US estate tax on death?

Post by BeBH65 » Mon Feb 11, 2019 8:42 am

I think the standard answer to avoid current and future tax liabilities to the US is : avoid direct investing in US-domiciled assets; always ensure there is a non-US domiciled layer in-between.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence). | Have a look at https://www.bogleheads.org/wiki/Outline_of_Non-US_domiciles

Topic Author
DJN
Posts: 211
Joined: Mon Nov 20, 2017 12:30 am

Re: EU investor: any way to avoid US estate tax on death?

Post by DJN » Mon Feb 11, 2019 8:51 am

Many thanks BeBH6,
for me in my next tax environment, the lower costs of US funds + the lower tax rates on dividends and capital gains is such that direct investment in US funds is very attractive. The co tenancy option with IB I believe allows an EU investor to avoid the US estate tax trap at least for one spouse. I would like to hear it from the horses mouth of someone who has actually done it (and by that I don't mean the dying bit).
DJN

gd
Posts: 1431
Joined: Sun Nov 15, 2009 8:35 am
Location: MA, USA

Re: EU investor: any way to avoid US estate tax on death?

Post by gd » Mon Feb 11, 2019 9:21 am

If I'm reading the post timestamps correctly, you appear to be getting worried that no one is responding to your posts between 3 am and 8 am EST, midnight and 5 am PST. Might I assume you are currently in the EU? :D

Topic Author
DJN
Posts: 211
Joined: Mon Nov 20, 2017 12:30 am

Re: EU investor: any way to avoid US estate tax on death?

Post by DJN » Mon Feb 11, 2019 9:28 am

Thanks,
not worried, but I have tried different approaches in the past to getting some attention here for NON US stuff and it is tricky to say the least. I just want informed answers not an impressive number of replies! And you are sort of right. I was aiming at European waking hours but I am currently wandering about in the desert in the ME.
:happy DJN

TedSwippet
Posts: 2018
Joined: Mon Jun 04, 2007 4:19 pm

Re: EU investor: any way to avoid US estate tax on death?

Post by TedSwippet » Mon Feb 11, 2019 10:58 am

DJN wrote:
Mon Feb 11, 2019 3:49 am
I believe that this can be addressed by setting up my investment account as a Joint Tenancy Account with my spouse as the joint tenant of the account (Interactive Brokers have this facility). In this case as I understand the position, on the death of one of the two joint tenancy account holders the assets in the account transfer to the other joint account holder without any need for probate and therefore avoids the dreaded US estate tax.
Unfortunately, on my reading of this paper from the reliable folk at JPM Financial, it seems that using joint tenancy will not allow you an easy escape from confiscatory US estate taxes:
Jointly held property. Code Sec. 2056(d)(1)(B) states that Code Sec. 2040(b) (which provides that property owned jointly with a right of survivorship between spouses will be included at one-half its value in the estate of the first spouse to die) does not apply if the surviving spouse of the decedent is not a U.S. citizen. Instead, 100% of such property is includable in the first decedent’s estate except to the extent the executor can substantiate the contributions of the noncitizen surviving spouse to the acquisition of the property. Thus, jointly owned U.S. situs property will be fully included in the gross estate of a nonresident alien who provided the funds to acquire such property.

Topic Author
DJN
Posts: 211
Joined: Mon Nov 20, 2017 12:30 am

Re: EU investor: any way to avoid US estate tax on death?

Post by DJN » Mon Feb 11, 2019 10:32 pm

Unfortunately, on my reading of this paper from the reliable folk at JPM Financial, it seems that using joint tenancy will not allow you an easy escape from confiscatory US estate taxes:
Hi Ted,
thanks for your insights, very helpful as ever. [OT comments removed by admin LadyGeek]

I wonder do you know how the QDOT fund approach works? This is mentioned in some papers that I have read but without any useful explanation.
thanks again
DJN

TedSwippet
Posts: 2018
Joined: Mon Jun 04, 2007 4:19 pm

Re: EU investor: any way to avoid US estate tax on death?

Post by TedSwippet » Tue Feb 12, 2019 3:19 am

[quoted post and response removed by admin LadyGeek]
DJN wrote:
Mon Feb 11, 2019 10:32 pm
I wonder do you know how the QDOT fund approach works? This is mentioned in some papers that I have read but without any useful explanation.
I looked into QDOTs briefly, but decided not to ever be in a situation where one would be required. My reasoning is generally summed up by the following from this article:
It is important to understand that QDOTs defer US estate tax liability; they don’t eliminate or avoid it.
...
The QDOT tax is generally equal to the amount of estate tax that would have been imposed, if the amount involved had been included in the taxable estate of the first spouse to die, and had not been transferred to the QDOT.
Not so much a 'solution' as a 'band aid' for a bad situation that might perhaps be unavoidable for some, but is definitely avoidable for you.

Topic Author
DJN
Posts: 211
Joined: Mon Nov 20, 2017 12:30 am

Re: EU investor: any way to avoid US estate tax on death?

Post by DJN » Tue Feb 12, 2019 5:48 am

viewtopic.php?t=225312
The link to another earlier BH post on the same topic which gives some more colour on the options. In one of the posts in this one, there is a mention of using a Joint Tenancy account in IB even in the case of holding Irish domiciled ETF's. "To help further in immunising against estate tax my IB account is joint with survivor rights with DW. There is always a small risk somewhere."

typical.investor
Posts: 518
Joined: Mon Jun 11, 2018 3:17 am

Re: EU investor: any way to avoid US estate tax on death?

Post by typical.investor » Tue Feb 12, 2019 5:59 am

TedSwippet wrote:
Tue Feb 12, 2019 3:19 am
[quoted post and response removed by admin LadyGeek]
DJN wrote:
Mon Feb 11, 2019 10:32 pm
I wonder do you know how the QDOT fund approach works? This is mentioned in some papers that I have read but without any useful explanation.
I looked into QDOTs briefly, but decided not to ever be in a situation where one would be required. My reasoning is generally summed up by the following from this article:
It is important to understand that QDOTs defer US estate tax liability; they don’t eliminate or avoid it.
...
The QDOT tax is generally equal to the amount of estate tax that would have been imposed, if the amount involved had been included in the taxable estate of the first spouse to die, and had not been transferred to the QDOT.
Not so much a 'solution' as a 'band aid' for a bad situation that might perhaps be unavoidable for some, but is definitely avoidable for you.
QDOTs are for Americans with a non-citizen spouse.

An FGT might be closest to what you are looking for, but given administration costs think normal Ireland domiciled funds would probably be the route to go.


http://www.nysscpa.org/news/publication ... r-families

User avatar
LadyGeek
Site Admin
Posts: 51095
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: EU investor: any way to avoid punitive US estate tax on death?

Post by LadyGeek » Tue Feb 12, 2019 5:04 pm

Discussions of dishonest behavior or bypassing the law is totally unacceptable - for any country. I removed comments regarding an approach to hide income of a deceased person (tax evasion).
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

Topic Author
DJN
Posts: 211
Joined: Mon Nov 20, 2017 12:30 am

Re: EU investor: any way to avoid punitive US estate tax on death?

Post by DJN » Tue Feb 12, 2019 11:46 pm

deleted

User avatar
galeno
Posts: 1508
Joined: Fri Dec 21, 2007 12:06 pm

Re: EU investor: any way to avoid punitive US estate tax on death?

Post by galeno » Wed Feb 13, 2019 3:00 pm

One of the benefits of using IB is that you can buy stocks and bonds from many different exchanges. You could start with USA domiciled ETFs or MFs. Then you can sell them and buy, e.g. Ireland domicled ETFs from non-USA exchanges.
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%.

Topic Author
DJN
Posts: 211
Joined: Mon Nov 20, 2017 12:30 am

Re: EU investor: any way to avoid punitive US estate tax on death?

Post by DJN » Wed Feb 13, 2019 10:40 pm

Hi galeno,
yes you are right. I have bought for the moment up to my $60,000 limit US domiciled funds with IB, I am getting some more advice on the joint tenancy issues as I have received conflicting views on this subject. The main issue is that I am slowly being worn down to the point I have just to accept inefficient outcomes for an EU investor in my circumstances and opt for simplicity instead. One of the problems I have encountered is that the advice of (fee) advisers hasn't always been accurate and the implications for US tax obligations can potentially be severe whatever about the
authorities efficiency.
thanks
DJN

User avatar
Hyperborea
Posts: 778
Joined: Sat Apr 15, 2017 10:31 am
Location: Osaka, Japan

Re: EU investor: any way to avoid punitive US estate tax on death?

Post by Hyperborea » Thu Feb 14, 2019 3:16 am

DJN wrote:
Wed Feb 13, 2019 10:40 pm
Hi galeno,
yes you are right. I have bought for the moment up to my $60,000 limit US domiciled funds with IB, I am getting some more advice on the joint tenancy issues as I have received conflicting views on this subject. The main issue is that I am slowly being worn down to the point I have just to accept inefficient outcomes for an EU investor in my circumstances and opt for simplicity instead. One of the problems I have encountered is that the advice of (fee) advisers hasn't always been accurate and the implications for US tax obligations can potentially be severe whatever about the
authorities efficiency.
thanks
DJN
I'm not sure where the "inefficient outcomes" are that you are worried about. The TER for non-US funds has fallen greatly over the last 10 years or so. You can pick up funds in the region of 0.2% for the equity side and 0.1% for the bond side. Not that long ago those numbers would have been great (maybe unattainable) for a US based investor. Yes, the US based investor can get lower than that now but the implications of a 0.1% fee reduction are not that large - $100 on a $100,000 portfolio. Even on a larger portfolio where the fee difference is thousands of dollars per year the risk of US estate tax is NOT (edited to add) worth it.
Last edited by Hyperborea on Thu Feb 14, 2019 5:10 pm, edited 1 time in total.
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

Topic Author
DJN
Posts: 211
Joined: Mon Nov 20, 2017 12:30 am

Re: EU investor: any way to avoid punitive US estate tax on death?

Post by DJN » Thu Feb 14, 2019 4:35 am

Hi Hyperborea,
the difference if you have a tax domicile in Ireland is the punitive local tax on UCITS at 41% on all gains, with no offset for other losses and a deemed and / or actual sale valuation after every 7 years subject to 41% tax. The option to use US stocks / funds taxed locally at your marginal tax rate is significantly more efficient with at least an 8% gain on taxation and much more when you consider tax relief and the ability to offset losses. The difference in fees is just another smaller incentive.
DJN

Topic Author
DJN
Posts: 211
Joined: Mon Nov 20, 2017 12:30 am

Re: EU investor: any way to avoid punitive US estate tax on death?

Post by DJN » Thu Feb 14, 2019 6:02 am

Options for addressing the US estate tax dilemma (following this short posting) seem to be:
- Buy US domiciled stocks / funds and anticipate that whatever your US - home country treaty states will apply to the receipts of your survivors.
- Buy US domiciled stocks / funds and that without a US - home country treaty your survivors should anticipate a 40% estate tax above $60K asset value.
- Buy US domiciled stocks / funds up to $60,000 value only and your survivors will receive the proceeds in full.
- Set up your platform account as a Joint Tenancy with survivor rights. The surviving tenant should anticipate a 40% estate tax for 50% of the estate value or will be asked to demonstrate what contribution that they made to the assets so as to be able to receive the assets estate tax free.
- Set up a Foreign Grantor Trust administered by a US trustee holding a non US entity which in turn can hold US domiciled stocks / funds which can be given to survivors without taxation

Or forget the whole thing and buy UCITS and pay your local taxes or if you want another option choose non regulated UK Investment Trusts such as Foreign and Colonial and struggle with UK estate taxes and tax treaties!

Any further comments are appreciated.
DJN

TedSwippet
Posts: 2018
Joined: Mon Jun 04, 2007 4:19 pm

Re: EU investor: any way to avoid punitive US estate tax on death?

Post by TedSwippet » Thu Feb 14, 2019 6:12 am

DJN wrote:
Thu Feb 14, 2019 4:35 am
... the difference if you have a tax domicile in Ireland is the punitive local tax on UCITS at 41% on all gains, with no offset for other losses and a deemed and / or actual sale valuation after every 7 years subject to 41% tax.
Ah yes. Just when you think US tax laws are as bonkers as it is possible to imagine, along come Ireland with this. Your problem is extremely niche then, but that doesn't make it any less acute.

Aside from the binary choice of either sucking up the extra tax cost with UCITS ETFs or the horrible US estate tax risk with US domiciled ETFs, off the top of my head I can think of only two other ways to avoid the US estate tax problem. The first would be to use a personal 'blocker' corporation, and hold your US domiciled assets within this. No idea how easy or hard this is to make it work with both Irish and US tax laws and regulations, nor how expensive, and you would need to make sure to use the exact right type of holding company to avoid the US's 'look-through' rules. The other would be to take out (additional?) life insurance to the value of the US estate tax that would come due should the worst happen.

international001
Posts: 597
Joined: Thu Feb 15, 2018 7:31 pm

Re: EU investor: any way to avoid punitive US estate tax on death?

Post by international001 » Thu Feb 14, 2019 6:57 am

Just for my information. So you are not a US citizen, but you are US resident and plan to move to EU.
I thought you were not able to hold US funds (FATCA)? Am I missing something?

AlohaJoe
Posts: 4134
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: EU investor: any way to avoid punitive US estate tax on death?

Post by AlohaJoe » Thu Feb 14, 2019 7:32 am

international001 wrote:
Thu Feb 14, 2019 6:57 am
Just for my information. So you are not a US citizen, but you are US resident and plan to move to EU.
I thought you were not able to hold US funds (FATCA)? Am I missing something?
FATCA has nothing to do with holding US funds. Lots of foreigners hold US funds.

(I am subject to FATCA and hold lots of US funds.)

Topic Author
DJN
Posts: 211
Joined: Mon Nov 20, 2017 12:30 am

Re: EU investor: any way to avoid punitive US estate tax on death?

Post by DJN » Thu Feb 14, 2019 7:38 am

Hi there,
clarification, I should have said this in the first place:
- EU citizen
- Offshore from EU and can therefore access US domiciled stocks / funds
- Non resident in US
- Not intending to reside in US
- Currently liable for US estate taxes on US domiciled stocks / funds as per notes above as far as I can work out to date
- Returning to EU country with unfavourable tax treaty, i.e. remains liable for estate tax on amounts of assets above $60k

typical.investor
Posts: 518
Joined: Mon Jun 11, 2018 3:17 am

Re: EU investor: any way to avoid punitive US estate tax on death?

Post by typical.investor » Thu Feb 14, 2019 7:47 am

TedSwippet wrote:
Thu Feb 14, 2019 6:12 am
DJN wrote:
Thu Feb 14, 2019 4:35 am
... the difference if you have a tax domicile in Ireland is the punitive local tax on UCITS at 41% on all gains, with no offset for other losses and a deemed and / or actual sale valuation after every 7 years subject to 41% tax.
Ah yes. Just when you think US tax laws are as bonkers as it is possible to imagine, along come Ireland with this. Your problem is extremely niche then, but that doesn't make it any less acute.

Aside from the binary choice of either sucking up the extra tax cost with UCITS ETFs or the horrible US estate tax risk with US domiciled ETFs, off the top of my head I can think of only two other ways to avoid the US estate tax problem. The first would be to use a personal 'blocker' corporation, and hold your US domiciled assets within this. No idea how easy or hard this is to make it work with both Irish and US tax laws and regulations, nor how expensive, and you would need to make sure to use the exact right type of holding company to avoid the US's 'look-through' rules. The other would be to take out (additional?) life insurance to the value of the US estate tax that would come due should the worst happen.
Ask galeno who posted above. I believe he used to use a US company he set up to hold assets. Ulitimately holding Irish domiciled ETFs was cheaper.

None of that dealt with Irish tax laws for Irish residents though. Still, it might be helpful.

Valuethinker
Posts: 37265
Joined: Fri May 11, 2007 11:07 am

Re: EU investor: any way to avoid punitive US estate tax on death?

Post by Valuethinker » Thu Feb 14, 2019 9:37 am

AlohaJoe wrote:
Thu Feb 14, 2019 7:32 am
international001 wrote:
Thu Feb 14, 2019 6:57 am
Just for my information. So you are not a US citizen, but you are US resident and plan to move to EU.
I thought you were not able to hold US funds (FATCA)? Am I missing something?
FATCA has nothing to do with holding US funds. Lots of foreigners hold US funds.

(I am subject to FATCA and hold lots of US funds.)
FATCA is a problem for Americans with financial affairs abroad.

No it is MIFID II and the associated consumer protection legislation in the EU (PRIIP ?).

Means that a non-expert investor cannot own funds which do not have certain key European disclosure documentation: KIID Key Investor Information Document. US funds of course meet SEC rules not UCITS VI (European fund rules) so don't have these.

AFAIK no European broker will now sell US products (ETFs included) to its EU retail clients.

There's another stinger in the tail, for UK residents the fund must be "reporting" classification by HMRC or the tax implications are grievous (been there, done that, paid that price for ignorance).

TedSwippet
Posts: 2018
Joined: Mon Jun 04, 2007 4:19 pm

Re: EU investor: any way to avoid punitive US estate tax on death?

Post by TedSwippet » Thu Feb 14, 2019 11:12 am

Valuethinker wrote:
Thu Feb 14, 2019 9:37 am
AFAIK no European broker will now sell US products (ETFs included) to its EU retail clients.
Right. And just to tie up loose ends here for the benefit of anyone still reading this ...

Due to PRIIPS regulations, EU residents effectively can no longer buy US domiciled ETFs, but they usually can continue to hold any they already own, and sell as and when necessary.

DJN's aim is to buy US domiciled ETFs before returning to the EU, specifically Ireland, because for DJN -- apart from the not inconsiderable risk of US estate taxes -- these could be more locally tax efficient than UCITS ETFs. The reason is some truly silly capital gain tax laws that Ireland applies to its resident investors who hold UCITS and other EU domiciled funds, but which do not apply to US domiciled funds.

User avatar
Epsilon Delta
Posts: 7800
Joined: Thu Apr 28, 2011 7:00 pm

Re: EU investor: any way to avoid punitive US estate tax on death? [Ireland]

Post by Epsilon Delta » Thu Feb 14, 2019 5:05 pm

The US and Ireland are not the only two countries in the world. If you find these are bad you might need a wider net.

Topic Author
DJN
Posts: 211
Joined: Mon Nov 20, 2017 12:30 am

Re: EU investor: any way to avoid punitive US estate tax on death?

Post by DJN » Fri Feb 15, 2019 1:29 am

Hi,
Epsilon Delta wrote:
Thu Feb 14, 2019 5:05 pm
The US and Ireland are not the only two countries in the world. If you find these are bad you might need a wider net.
This is reasonable advice and is one of the options under consideration.
However it is pretty extreme if you have to up sticks and move your family to a new jurisdiction, that can be complicated. There are options for this including Non Habitual Residence and you can see the options here if you are interested:
https://www.bogleheads.org/wiki/EU_non- ... _residence

msk
Posts: 1034
Joined: Mon Aug 15, 2016 10:40 am

Re: EU investor: any way to avoid punitive US estate tax on death?

Post by msk » Fri Feb 15, 2019 2:10 am

Just stating that one is an EU citizen tax resident in an EU country does not illuminate all that is relevant. Assuming the OP is going to be tax resident in Ireland then I suggest he calls his local bank branch in Ireland and makes an appointment with an investment/tax advisor to review his actual or future residency status. EU countries do not have uniform tax laws and hence locally relevant advice is crucial. Tax residency in London or Belfast is not the same as tax residency in Dublin. A friend with a NW in 10 figures has companies registered in various tax jurisdictions all over the world. Depending on how big a portfolio one wishes to shield, it may be worthwhile to use a company structure in e.g. the Channel Islands, despite the annual fees. With more average BH portfolios in the 7 figure range the local bank's advisor may have suggestions that are less costly in annual expenditure. A word of warning regarding Joint accounts with Survivor Rights at IB. Make sure that your partner is always able to actually sign on at IB (remarkable how quickly we forget routine procedures like two-factor authentication with advancing age and non-use) and that the Joint bank account that your IB account has been designated to link to remains able to receive transfers from IB even after you or your joint signatory dies or becomes incapacitated. You will still have the nagging issue as to what happens if both the joint IB account owners die at the same time. This is where a company structure outliving both of you becomes relevant.

User avatar
galeno
Posts: 1508
Joined: Fri Dec 21, 2007 12:06 pm

Re: EU investor: any way to avoid punitive US estate tax on death?

Post by galeno » Fri Feb 15, 2019 3:19 pm

Before we went with IB we used Schwab International. Schwab International is for non-USA persons. Schwab International is just like Schwab USA except it allows one a limited access to Ireland domiciled FUNDS. All those funds are actively managed and all with outrageous ERs.

So for us it was cheaper to use the USA domiciled ETFs for equities (50% SCHB + 40% SCHF + 10% SCHE). It was painful to pay the 30% dividend income tax.

The FI (fixed income) side was limited to USA FDIC Insured CDs from USA banks or direct USA Treasuries. Any other USA domicled fixed income asset was subject to the 30% interest income tax. We used the brokered CDs that Schwab International offers with one click buying.

A more important problem using Schwab International was the horrible USA inheritance laws against USA-NRAs. Our (Costa Rican) attorney suggested we form a family corporation and open a corporate account which is what we did. A corporations in CR can't die until someone kills it.

Before I discovered IB (Interactive Brokers) Schwab International was the best we could do. All the other non-USA brokers I looked at (mainly in Bermuda) seemed too shady. Trying to invest like a USA Boglehead was very expensive and very inefficient in the old days. It was also very LONELY.

When we discovered IB (Interactive Brokers) I felt like I died and went to Boglehead heaven. AT LAST we non-USA persons can invest ALMOST as cheaply and ALMOST as efficiently as our USA friends who mostly populate these boards.
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%.

Post Reply