Navigating US tax traps

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Topic Author
c0nst
Posts: 6
Joined: Mon Aug 05, 2019 8:25 am

Navigating US tax traps

Post by c0nst » Wed Oct 16, 2019 6:41 am

Hey there.

Could somebody please confirm if I understand the estate tax problems correctly.
a. If I die while holding more than 60K equivalent (market value) in stocks my family would pay up to 40% tax on the sum exceeding 60K.
Example: 160K market value in US stocks - my family would pay 40K (160 - 60 = 100; 100 * 0.4 = 40)
b. If I have more than 60K in cash (assuming everything else is in Ireland domiciled ETFs) my family would also pay 40% tax on exceeding amount.
Example: Ireland domiciled ETFs for 160K USD market value plus 160K USD in cash on broker account. My family would pay 40K (160 - 60 = 100; 100 * 0.4 = 40) for cash and zero for ETFs.
Am I right?

I have few questions on that as well:
1. Are ADRs (American Depositary Receipt) counts towards the US equities or not? For instance, Teva ADR, BP ADR.
2. If I have few brokerage accounts, does estate tax apply to each account individually? For instance, I have 2 accounts with stocks 50K market value. Would my family pay zero estate tax or (50+50 - 60) * 0.4 = 16K

Thank you in advance.

Gill
Posts: 5741
Joined: Sun Mar 04, 2007 8:38 pm
Location: Florida

Re: Navigating US tax traps

Post by Gill » Wed Oct 16, 2019 7:24 am

Are you a nonresident alien?
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal

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BeBH65
Posts: 1555
Joined: Sat Jul 04, 2015 7:28 am

Re: Navigating US tax traps

Post by BeBH65 » Wed Oct 16, 2019 7:28 am

Please have a look at the wikin pages: Outline_of_Non-US_domiciles#Tax_issues.

Summary It all depends on where you hold your assets, your nationality, your domicile, your residency and the applicable local-laws and tax-treaties.

We need more info to direct you to the correct rules.
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

TedSwippet
Posts: 2501
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Navigating US tax traps

Post by TedSwippet » Wed Oct 16, 2019 7:42 am

Welcome.

In the responses below, I have assumed that you are a US nonresident alien living in one of the many countries without a US estate tax treaty. If either of these is not the case, the responses to your questions will be different.
c0nst wrote:
Wed Oct 16, 2019 6:41 am
a. If I die while holding more than 60K equivalent (market value) in stocks my family would pay up to 40% tax on the sum exceeding 60K.
Example: 160K market value in US stocks - my family would pay 40K (160 - 60 = 100; 100 * 0.4 = 40)
Nearly right. The logic is correct, but the numbers are slightly off.

$100k of your $160k is liable for the US estate tax, but the tax itself is graduated, and for nonresident aliens it runs from 26% on the first dollar above $60k up to a maximum of 40% at $1mm. In practice, your family would face around $29k in US tax on this example set of numbers.
c0nst wrote:
Wed Oct 16, 2019 6:41 am
b. If I have more than 60K in cash (assuming everything else is in Ireland domiciled ETFs) my family would also pay 40% tax on exceeding amount.
Example: Ireland domiciled ETFs for 160K USD market value plus 160K USD in cash on broker account. My family would pay 40K (160 - 60 = 100; 100 * 0.4 = 40) for cash and zero for ETFs.
Again, right on the logic, but not quite on the numbers.

As before, $100k of your assets are liable for the US estate tax -- that is, the cash part. Your Ireland domiciled ETFs are excluded, as they are non-'US situs' assets. The US estate tax liability would then be the same as in your first example, since the value of 'US situs' assets is the same.
c0nst wrote:
Wed Oct 16, 2019 6:41 am
1. Are ADRs (American Depositary Receipt) counts towards the US equities or not? For instance, Teva ADR, BP ADR.
This paper suggests that ADRs are not US situs assets, and so not liable to US estate tax:

https://www.internationallawoffice.com/ ... s-Property

The article is a bit old now, but I am not aware of any change in or reversal of this decision, so it seems safe to conclude that ADRs are safe from US estate tax, at least for the moment.
c0nst wrote:
Wed Oct 16, 2019 6:41 am
2. If I have few brokerage accounts, does estate tax apply to each account individually? For instance, I have 2 accounts with stocks 50K market value. Would my family pay zero estate tax or (50+50 - 60) * 0.4 = 16K
It is the aggregate (sum) of all your US situs assets that counts for US estate tax purposes. Splitting things into separate accounts of below $60k will not help. Your US estate tax liability here would be on $40k of US assets, so around $11k (rounded).

Given the above then, entirely avoiding US domiciled ETFs and other US investments and using either Ireland domiciled equivalents or ADRs seems sensible for you.

Topic Author
c0nst
Posts: 6
Joined: Mon Aug 05, 2019 8:25 am

Re: Navigating US tax traps

Post by c0nst » Wed Oct 16, 2019 7:46 am

I'm from Ukraine paying taxes in Ukraine. I have an account at IB in USD.
Ukraine has income tax treaty with US (so, I pay 15% to US and that's all), and no estate tax treaty.

My answer to "Navigating US tax traps" is here - https://www.bogleheads.org/wiki/Non-US_ ... x_traps#A4
Last edited by c0nst on Wed Oct 16, 2019 8:15 am, edited 1 time in total.

Topic Author
c0nst
Posts: 6
Joined: Mon Aug 05, 2019 8:25 am

Re: Navigating US tax traps

Post by c0nst » Wed Oct 16, 2019 7:49 am

TedSwippet, thank you very much for such a detailed answer. Really appreciate your time and effort.

TedSwippet
Posts: 2501
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Navigating US tax traps

Post by TedSwippet » Wed Oct 16, 2019 8:04 am

c0nst wrote:
Wed Oct 16, 2019 7:49 am
TedSwippet, thank you very much for such a detailed answer. Really appreciate your time and effort.
No problem. Thanks for dropping by again.

Also, your question on ADRs was an interesting one, and not something I had considered before -- thanks for raising it. When I have a bit of spare time I will add a note on ADRs to the wiki.

Topic Author
c0nst
Posts: 6
Joined: Mon Aug 05, 2019 8:25 am

Re: Navigating US tax traps

Post by c0nst » Sun Nov 03, 2019 5:35 am

Hi again.

I was digging deeper into the topic and I have even more questions )

3. When moving from US-domiciled ETFs for non-US stocks (VYMI ETF, for instance) to the Ireland-domiciled analog I would eliminate both problems: estate tax and 15% dividend tax. Am I right?
4. I noticed there are Canadian stocks traded on NYSE, for instance Royal Bank of Canada (RY) or Canadian National Railway (CNI). They are displayed as common stocks, not ADR. I'm curious are they estate tax treaty eligible or not?
5. Interactive Brokers have Joint accounts with three different types. The type I'm interested in is "Tenancy by the Entirety - A form of ownership where the owners are married and each spouse has an equal and undivided interest in the property (e.g., each spouse mutually owns the property). If one spouse was to die, the full title of the property passes to the surviving spouse." Is this type of account eligible for estate tax or not in case I die (assuming I continue to invest in US stocks and my investments exceed 60K USD)?

Thank you.

TedSwippet
Posts: 2501
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Navigating US tax traps

Post by TedSwippet » Sun Nov 03, 2019 8:21 am

c0nst wrote:
Sun Nov 03, 2019 5:35 am
3. When moving from US-domiciled ETFs for non-US stocks (VYMI ETF, for instance) to the Ireland-domiciled analog I would eliminate both problems: estate tax and 15% dividend tax. Am I right?
If you buy a US domiciled ETF, you would pay 15% in US tax on the dividends from them (US/Ukraine treaty rate). If you buy an Ireland domiciled ETF, the ETF will internally pay 15% to the US on dividends it receives from US stocks, nothing to the US on dividends it receives from non-US stocks, and it will pay the remainder to you with no added US or Irish tax payable. In income tax terms, neutral where the ETF holds only US stocks, and a benefit for Ireland domiciled ETFs where the ETF holds any non-US stock component.

For US estate tax, any US domiciled ETF holdings are at risk, and all Ireland domiciled holdings are safe. So you entirely eliminate the threat of US estate tax with Ireland domiciled ETFs.
c0nst wrote:
Sun Nov 03, 2019 5:35 am
4. I noticed there are Canadian stocks traded on NYSE, for instance Royal Bank of Canada (RY) or Canadian National Railway (CNI). They are displayed as common stocks, not ADR. I'm curious are they estate tax treaty eligible or not?
It is hard to tell definitively whether stocks of non-US companies listed on US exchanges are 'US situs', and so in scope for US estate taxes. However, this suggests that they are not 'US situs':

https://www.law.cornell.edu/cfr/text/26/20.2105-1
§ 20.2105-1 Estates of nonresidents not citizens; property without the United States.
Property of a nonresident who was not a citizen of the United States at the time of his death is considered to be situated outside the United States if it is -
...
(f) Shares of stock issued by a corporation which is not a domestic corporation, regardless of the location of the certificates.
So on the face of things, these look like they might be safe. Very difficult to be sure, though.
c0nst wrote:
Sun Nov 03, 2019 5:35 am
5. Interactive Brokers have Joint accounts with three different types. The type I'm interested in is "Tenancy by the Entirety - A form of ownership where the owners are married and each spouse has an equal and undivided interest in the property (e.g., each spouse mutually owns the property). If one spouse was to die, the full title of the property passes to the surviving spouse." Is this type of account eligible for estate tax or not in case I die (assuming I continue to invest in US stocks and my investments exceed 60K USD)?
You cannot simply use a joint account to easily bypass the US's horrible estate tax rules. If you funded this joint account (or just by default), the US would consider all the US situs parts of the entire joint account as liable for US estate tax on your death:

http://www.jpmfinancialservices.com/ima ... xation.pdf
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. Because jointly owned property with a right of survivorship passes outright to the surviving spouse, if the surviving spouse is not a U.S. citizen, the surviving spouse will need to transfer the portion included in the gross estate to a QDOT in order to qualify for a marital deduction.
If you are intent on holding US stocks or ETFs and exceed the US's pitifully low estate tax exemption for nonresident aliens, you will want to interpose an intermediate holding company between you and your US situated investments. Perhaps ideally more than one -- one non-US, the other US based.

Topic Author
c0nst
Posts: 6
Joined: Mon Aug 05, 2019 8:25 am

Re: Navigating US tax traps

Post by c0nst » Sun Nov 03, 2019 10:43 am

TedSwippet, thank you again for your comments. That's really helpful.

I've just started investing in stock markets and for now my top-level plan looks like this:
- I would limit my US-domiciled investments to about 40-45K (~10-15 high quality DGI companies) assuming market value would grow later on;
- I would also invest in ~10 high-quality non-US companies (I will proceed my investigation with Canadian stocks since they have quite a few strong players);
- I would consistently invest in Ireland-domiciled ETFs. Since I am not going to withdraw money for at least 10 years, at first I would only invest in S&P 500 tracking ETF and EM ETF. In about 10 years I would start concentrating on bonds to achieve 70/30 or 60/40 stocks/bonds ratio.

I am considering the following ETFs:
- iShares Core S&P 500 UCITS ETF USD Acc (CSPX)
- iShares Core MSCI Emerging Markets IMI UCITS (EIMI)
- Vanguard USD Treasury Bond UCITS USD (VDTY)

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