US Estate Tax on Ireland domiciled ETFs

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Khan
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US Estate Tax on Ireland domiciled ETFs

Post by Khan »

Hi,

One of my facebook friend who is a non-US citizen, non-resident alien wrote an email to IBKR.

1. My holdings OF VWRA AND IWDA ARE US ASSETS AND MY JOINT ACC WILL NOT BE USABLE ( in case of unfortunate demise of one of us) TILL FORM 706 NA is submitted by me or my spouse for TAX FILING (PLS NOTE : we hold joint ibkr with rights of survivorship option and trade ONLY irish domiciled US ETFs and ibkr confirmed these as US assets) !!

2. IBKR acc becomes operatable by survivor ONLY AFTER 706 NA filing, TILL SUCH TIME ACC WILL BE FROZEN FOR TRANSFERS AND WITHDRAWALS.

now that they have confirmed in writing this to me and since my holdings are above 60k$, I THINK IT IS TIME TO MOVE OUT OF IBKR ASAP.

ANY HELP HERE ON WHAT OTHER PLATFORMS TO MOVE TO AND THEIR ASSOCIATED CHARGES WILL HELP.

UPDATE : IBKR HAS AGAIN REPLIED by EMAIL to me, THAT THESE ARE INDEED US PRODUCTS AND TAX FILING IS NEEDED!! Either they are completely misinformed or we ARE :(
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Another conversation by a different friend.


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Can any please clarify with some reference from IRS.
TedSwippet
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Re: US Estate Tax on Ireland domiciled ETFs

Post by TedSwippet »

Khan wrote: Thu Aug 03, 2023 6:31 am UPDATE : IBKR HAS AGAIN REPLIED by EMAIL to me, THAT THESE ARE INDEED US PRODUCTS AND TAX FILING IS NEEDED!! Either they are completely misinformed or we ARE :(
Already under discussion in this thread: viewtopic.php?p=7391730#p7391730
Khan wrote: Thu Aug 03, 2023 6:31 am Can any please clarify with some reference from IRS.
IRS estate tax examination manual:
4.25.4.7.1 (05-26-2023)
Determining Whether Property is Located in the United States

Unless a treaty provides otherwise, apply the following rules to determine whether assets owned at death by a nonresident noncitizen decedent are located in the United States:
a. Real estate is deemed U.S. situs property if situated in the United States.
b. Tangible personal property is deemed to be U.S. situs property if physically present in the United States on the date of death. There is an exception for works of art which are imported solely for public exhibition, on loan to a non-profit gallery or museum, or on exhibition or en route to or from an exhibition.
c. Stock of U.S. corporations is considered property in the United States.
d. Generally, debt obligations are property located in the United States if they are debts of a U.S. citizen or resident, a domestic partnership or corporation, a domestic estate or trust, the United States, a state, or a political subdivision of a state or the District of Columbia.
e. Deposits with a U.S. branch of a foreign corporation that is engaged in the commercial banking business are treated as property located in the United States.
An Ireland domiciled ETF is none of these things.
daviddem
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Re: US Estate Tax on Ireland domiciled ETFs

Post by daviddem »

Khan wrote: Thu Aug 03, 2023 6:31 am
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This email is one I sent. The reply was more positive, however it came from a IB rep located in Ireland, possibly more acquainted to the process for IBIE accounts. However I was clear in my questions that my account was with IB LLC. She replied twice that in case no estate tax is due (no US situs assets in excess of 60k in the estate of the decedent), neither a 706 filing, nor obtaining a transfer certificate from the IRS are necessary. See below.

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TedSwippet
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Re: US Estate Tax on Ireland domiciled ETFs

Post by TedSwippet »

daviddem wrote: Thu Aug 03, 2023 8:51 am This email is one I sent. The reply was more positive, however it came from a IB rep located in Ireland, possibly more acquainted to the process for IBIE accounts. However I was clear in my questions that my account was with IB LLC. She replied twice that in case no estate tax is due (no US situs assets in excess of 60k in the estate of the decedent), neither a 706 filing, nor obtaining a transfer certificate from the IRS are necessary. ...
Helpful information. Thanks for posting.

I think though what is causing the most anxiety here is IBKR's response to a direct query "Irish domiciled ETFs [such] as VWRA and IWDA .. Do these qualify as US assets". In reply, Patrick R stated "In this case, those are US products ...". By every available definition, they simply are not.

In other words, it's not so much the hassle, delay, and generally unwanted misery of dealing wth the IRS and its hateful form 706-NA filing process as it is the worry that at least one person within IBKR believes that Ireland domiciled ETFs are 'US situs' and so would lead to an actual US tax liability, rather than just a pointless paperwork exercise with the IRS (with trademark long delay) in order to get IBKR the clearance they need from the IRS to release the account funds to nonresident alien beneficiaries.

Certainly that's the part that worries me most about the quoted exchanges between whoever and IBKR. IBKR may or may not insist on you filing the stupid 706-NA, but they ought not be suggesting that non-US domiciled UCITS ETFs are 'US situs', with the result that they would be includable on the 706-NA and therefore liable for US estate tax. Yet IBKR appear to be doing just that.
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Re: US Estate Tax on Ireland domiciled ETFs

Post by daviddem »

Well some great news here. Directly from IB's estate processing boss. The below not only confirms that Patrick was wrong in his emails, but it also confirms that IB will not request a transfer certificate from the IRS if they assess that you hold less than $60k in US situs assets in your account. This is consistent with the answer I received from another member of his team (see above), who said that if the decedent was holding less than $60k in US situs assets in his account, then a simple letter from his heirs to IB stating that he was not holding US situs assets in his account or any other brokerages will suffice for IB to release the account.

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TedSwippet
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Re: US Estate Tax on Ireland domiciled ETFs

Post by TedSwippet »

daviddem wrote: Tue Aug 08, 2023 1:42 am Well some great news here. Directly from IB's estate processing boss. The below not only confirms that Patrick was wrong in his emails, but it also confirms that IB will not request a transfer certificate from the IRS if they assess that you hold less than $60k in US situs assets in your account. ...
Thanks for posting this update. Good to hear, but also kind of depressing that IBKR's estate processing team needed to be corrected on something as basic as this, since it is (presumably) their job to know it.
assyadh
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Re: US Estate Tax on Ireland domiciled ETFs

Post by assyadh »

Wow this is nuts. It shows well the pro of having your accounts close to you.

I'm thinking one can use IBKR while on the accumulation stage, but if retiring in Europe for example should switch to Degiro or another local broker once in the decumulation phase.

What are a few € for trades compared to the risk of your wealth kidnapped by a foreign entity and your heirs, spouse etc left hanging.

For this reason I think it's primordial to also have individual checking or savings account with something like 6 months of cash needs. If a spouse dies, then the surviving spouse has access to liquidity, unlike with a joint account..
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calmevening
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Re: US Estate Tax on Ireland domiciled ETFs

Post by calmevening »

After reading this thread, I’m still left wondering whether cash deposits held at a non-US IB subsidiary (e.g., IB UK, IB Singapore) would be subject to US estate taxes?

In a comment by forum user daviddem dated 3 Aug 2023 in this thread, there is a screenshot of an email by estateprocessing@interactivebrokers.com dated 19 June 2023 telling the customer that “cash does count as US situs as IBUK is an introducing broker to IB LLC.”

For clarity, here, I believe that “US situs” means US situated asset, “IBUK” means Interactive Brokers United Kingdom. And “cash” could possibly be referring to all the currencies held at IB by the client?

Now, the U.S. Internal Revenue Code Section 2105(b)(2) states, and I quote, “ […] the following shall not be deemed property within the United States – deposits with a foreign branch of a domestic corporation or domestic partnership, if such branch is engaged in the commercial banking business, […]” [1] .

So, my read is, and correct me if I'm wrong, that if Interactive Brokers LLC is a US corporation engaged in the commercial banking business, then the cash deposits in a decedent's account with IB's foreign branches (e.g., IB UK, IB Singapore) should not be treated as an US-situated asset, and therefore shouldn't be subject to US estate taxation.

It would be great if anyone more knowledgeable could chime in on this: Do cash deposits held at non-US IB subsidiaries (e.g., IB UK, IB Singapore) subject to US estate taxes?



References
[1] https://irc.bloombergtax.com/public/usc ... ction_2105
TedSwippet
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Re: US Estate Tax on Ireland domiciled ETFs

Post by TedSwippet »

calmevening wrote: Thu Oct 10, 2024 12:51 pm It would be great if anyone more knowledgeable could chime in on this: Do cash deposits held at non-US IB subsidiaries (e.g., IB UK, IB Singapore) subject to US estate taxes?
I'm not in any way knowledgeable on the minutiae of this, but since you asked about it specifically in another thread, my $0.02 is below.

As far as I can tell, the only way to get a definitive answer on this would be to fully understand the internal corporate structure of IB, particularly in relation to cash flows within and to/from their non-US subsidiaries. None of us can really see this from the outside. And asking IB directly elicits a range of responses, some of which contradict the actual US tax laws (clearly wrong), while others contradict IB's own prior statements (so at least one error here also). In short, nobody knows. Including, apparently, IB themselves.

So, here is my take on all of this. For US estate tax reasons, US nonresident aliens in countries lacking a US estate tax treaty (in reality, this is all but a handful of countries) should never, ever hold US domiciled ETFs, and should use only non-US domiciled UCITS equivalents. This means that their primary investments are entirely safe from US estate tax. The only remaining question mark is then over any broker cash holding.

In which case, stay below $60k in cash and you have zero exposure either way. :-) That is, whether or not your cash holding in whatever IB subsidiary you hold it is 'US situs'. In practice, a brokerage account is not really the place to keep long-term (or even short-term) cash anyway. It is simpler all round just to take the steps necessary to avoid this possible trap than to try to work out if it really is a trap in the first place.
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galeno
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Re: US Estate Tax on Ireland domiciled ETFs

Post by galeno »

Thanks Ted.
KISS & STC.
Lazerr
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Re: US Estate Tax on Ireland domiciled ETFs

Post by Lazerr »

IBUK seems to be just a front for IB LLC. When I had an account at IBUK and got interest from them, I was issued a 1042-S for that and it was considered US source. With this, I would assume that any cash held at IBUK is US situs. IBIE on the other hand subjects interest to Irish withholding taxes and will not issue a 1042-S due to that. Most likely, cash at IBIE is considered non-US situs.
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galeno
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Re: US Estate Tax on Ireland domiciled ETFs

Post by galeno »

Thanks Ted.
KISS & STC.
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calmevening
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Re: US Estate Tax on Ireland domiciled ETFs

Post by calmevening »

Lazerr wrote: Sun Oct 13, 2024 6:07 am IBUK seems to be just a front for IB LLC. When I had an account at IBUK and got interest from them, I was issued a 1042-S for that and it was considered US source. With this, I would assume that any cash held at IBUK is US situs. IBIE on the other hand subjects interest to Irish withholding taxes and will not issue a 1042-S due to that. Most likely, cash at IBIE is considered non-US situs.
Thanks for sharing your experience. Really wish IB could step up their disclosure game to customers by informing customers which non-US IB branches would cash deposits and U.S. stocks be perceived as US-situs. I'm sure this is something customers would really like to know in light of the US estate tax for non-resident aliens clocking in at a hefty 18%-40%.
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Re: US Estate Tax on Ireland domiciled ETFs

Post by TedSwippet »

calmevening wrote: Wed Oct 16, 2024 5:32 am
Lazerr wrote: Sun Oct 13, 2024 6:07 am IBUK seems to be just a front for IB LLC. When I had an account at IBUK and got interest from them, I was issued a 1042-S for that and it was considered US source. With this, I would assume that any cash held at IBUK is US situs. IBIE on the other hand subjects interest to Irish withholding taxes and will not issue a 1042-S due to that. Most likely, cash at IBIE is considered non-US situs.
Thanks for sharing your experience. Really wish IB could step up their disclosure game to customers by informing customers which non-US IB branches would cash deposits and U.S. stocks be perceived as US-situs. I'm sure this is something customers would really like to know in light of the US estate tax for non-resident aliens clocking in at a hefty 18%-40%.
My sense, at least based on the confused and contradictory responses seen from IB in the past, is that they are really no clearer on this than the rest of us. Much depends on their own internal organisation around foreign subsidiaries, but even with this fully determined, the US's tax rules themselves are far from clear. That is, not one but two fully overlapping grey and ill-defined areas, so that firming up one doesn't solve much of anything.

(Also, by the way, the US estate tax for nonresident aliens holding more than $60k in US situs assets actually starts at a hefty "26% of the excess", and climbs rapidly from there. Just. Say. No.)
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Re: US Estate Tax on Ireland domiciled ETFs

Post by daviddem »

I know of practical cases where IBKR promptly released the account to the heirs when the $60k US situs assets threshold was not exceeded, with absolutely no need for an IRS filing.

I also know of at least one practical case in Europe (IBIE account) where the 706NA filing and payment of US estate tax was required because the account was holding US situs assets. And that was indeed a nightmare for the heirs to sort out.

US stocks and US domiciled ETFs and mutual funds always remain US situs assets, no matter where they are held. Holding such assets with a non US broker does not exempt you from US estate tax.

As Ted said above, the solution is simple: just do not hold US situs assets outside of an Irish ETF wrapper. As for cash balances, there is absolutely no reason to hold cash in excess of $60k in an IBKR account. Instead, invest the cash in a non-US domiciled money market ETF or mutual fund. Not only this will shelter it from US estate tax, but it will also yield more interest than IB would give you. Absolute no brainer.

See also this thread.
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calmevening
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Re: US Estate Tax on Ireland domiciled ETFs

Post by calmevening »

daviddem wrote: Thu Oct 17, 2024 12:48 am
[...]

As for cash balances, there is absolutely no reason to hold cash in excess of $60k in an IBKR account. Instead, invest the cash in a non-US domiciled money market ETF or mutual fund. Not only this will shelter it from US estate tax, but it will also yield more interest than IB would give you. Absolute no brainer.
I would be careful with doling out this piece of advice (if i may christen it as that) because it roughly translates to being invested nearly all the time – a practice that isn't necessarily aligned with some investment strategies/philosophies. Even for someone who follows this advice and, as a result, is permanently invested in non-US situs assets, he/she has to be mindful when performing tasks that involve cash balances.

E.g., when liquidating holdings. This "simple" act becomes something the investor has to do in tranches: liquidate roughly USD 60,000 worth of assets, get rid of the cash via a IBKR withdrawal to a bank, or by buying another non-US asset to free up their cash quota, then repeat the process, liquidate, get rid of the balance, liquidate, get rid of the balance, and so on. What if the investor wishes to rapidly liquidate their USD-denominated assets (for some reason)? It can become a tricky maneuver. This prevents the possible but unlikely event in where the investor dies holding more than USD 60,000 in cash balances. I don't believe there is a readily available function on IBKR that automates this sell-then-do-somthing-else-with-the-resulting-cash process for the customer.

As such, the quoted advice is not an "absolute no brainer". Pulling it off minimally requires planning in advance, and deft in the execution of tasks involving cash balances.

In the spirit of practicality, I submit that this idea might possibly benefit particular segments of retail investors, but becomes cumbersome for larger holdings.
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Re: US Estate Tax on Ireland domiciled ETFs

Post by daviddem »

calmevening wrote: Sat Oct 19, 2024 1:18 am
I would be careful with doling out this piece of advice (if i may christen it as that) because it roughly translates to being invested nearly all the time – a practice that isn't necessarily aligned with some investment strategies/philosophies. Even for someone who follows this advice and, as a result, is permanently invested in non-US situs assets, he/she has to be mindful when performing tasks that involve cash balances.

E.g., when liquidating holdings. This "simple" act becomes something the investor has to do in tranches: liquidate roughly USD 60,000 worth of assets, get rid of the cash via a IBKR withdrawal to a bank, or by buying another non-US asset to free up their cash quota, then repeat the process, liquidate, get rid of the balance, liquidate, get rid of the balance, and so on. What if the investor wishes to rapidly liquidate their USD-denominated assets (for some reason)? It can become a tricky maneuver. This prevents the possible but unlikely event in where the investor dies holding more than USD 60,000 in cash balances. I don't believe there is a readily available function on IBKR that automates this sell-then-do-somthing-else-with-the-resulting-cash process for the customer.

As such, the quoted advice is not an "absolute no brainer". Pulling it off minimally requires planning in advance, and deft in the execution of tasks involving cash balances.

In the spirit of practicality, I submit that this idea might possibly benefit particular segments of retail investors, but becomes cumbersome for larger holdings.
You don't need to be below $60k cash at all times, you only need to be below $60k cash at the time of your death. Just don't die while rebalancing. If you have a margin account, you don't need to wait for a trade to settle to purchase something else or wire the money out. IBKR Global Trader also has a "swap" function where you can change a holding for another and the underlying trades will be performed automatically by IBKR in the background.
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Re: US Estate Tax on Ireland domiciled ETFs

Post by Laurizas »

daviddem wrote: Sat Oct 19, 2024 7:02 am Just don't die while rebalancing.
+1
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calmevening
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Re: US Estate Tax on Ireland domiciled ETFs

Post by calmevening »

daviddem wrote: Sat Oct 19, 2024 7:02 am [...] Just don't die while rebalancing. [...]
Will uh keep the Grim Reaper in the loop. 8-)
daviddem wrote: Sat Oct 19, 2024 7:02 am [...] If you have a margin account, you don't need to wait for a trade to settle to purchase something else or wire the money out. IBKR Global Trader also has a "swap" function where you can change a holding for another and the underlying trades will be performed automatically by IBKR in the background.
Thanks for suggesting margin accounts & "swap" function.

For anyone who's interested in the swap function, IB has a brief youtube video introducing it https://www.interactivebrokers.com/camp ... rader-swap . Would think the swap function's usefulness extends beyond the use-case discussed in this thread. Seems like a helpful function or order type to keep in mind.
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Re: US Estate Tax on Ireland domiciled ETFs

Post by daviddem »

calmevening wrote: Sun Oct 20, 2024 12:44 pm Thanks for suggesting margin accounts & "swap" function.

For anyone who's interested in the swap function, IB has a brief youtube video introducing it https://www.interactivebrokers.com/camp ... rader-swap . Would think the swap function's usefulness extends beyond the use-case discussed in this thread. Seems like a helpful function or order type to keep in mind.
My only gripe with the swap function is that it seems to use market orders in the background, and I hate market orders. I would much rather use two separate marketable limit orders in short succession and do my best to not die in the interim.

Why are market orders a bad idea (especially with ETFs)? Well here is one example of why. I also got personally ripped off by 15% in March 2020 when I placed a market order in the midst of a market halt I was not aware of. When the market resumed, my order somehow filled 15% away from the actual market price (in my disfavor of course).
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calmevening
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Re: US Estate Tax on Ireland domiciled ETFs

Post by calmevening »

daviddem wrote: Mon Oct 21, 2024 12:06 am
My only gripe with the swap function is that it seems to use market orders in the background, and I hate market orders. I would much rather use two separate marketable limit orders in short succession and do my best to not die in the interim.

Why are market orders a bad idea (especially with ETFs)? Well here is one example of why. I also got personally ripped off by 15% in March 2020 when I placed a market order in the midst of a market halt I was not aware of. When the market resumed, my order somehow filled 15% away from the actual market price (in my disfavor of course).
IB should update the swap function to let users have an option to specify that limit orders be used instead of market orders. Knowing that its currently implemented using two market orders, one should be careful using the swap function to make large trades (large relative to order queue size).

Thanks for sharing the minute details of IB's swap function, I found it quite informative.
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Re: US Estate Tax on Ireland domiciled ETFs

Post by newspaper »

daviddem wrote: Thu Oct 17, 2024 12:48 am I know of practical cases where IBKR promptly released the account to the heirs when the $60k US situs assets threshold was not exceeded, with absolutely no need for an IRS filing.

I also know of at least one practical case in Europe (IBIE account) where the 706NA filing and payment of US estate tax was required because the account was holding US situs assets. And that was indeed a nightmare for the heirs to sort out.
Going a bit off-topic here, but do you also have knowledge about how the processing was handled by IBKR? I mean, did IBKR just accept notarized/translated documents from the heirs emitted by their countries' governments and that was enough?
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Re: US Estate Tax on Ireland domiciled ETFs

Post by daviddem »

Yes they did. But your mileage may vary from one country of residence to another, depending on what the inheritance process is in that country. Basically, the process / requirements from IBKR should be the same as they are for normal bank accounts in the country of residence of the deceased. In many countries, bank accounts are frozen until the succession is resolved, which can take several months.

I even know of a case in the UAE where IBKR released the joint account to the survivor holder without asking for anything more than a death certificate, even though the law in the UAE says that joint accounts are to be frozen until legal heirship is established by a court of law. This might not be the case in other countries where IBKR has a legal entity, such as in Europe, Hong Kong, Singapore etc. They will also soon have a legal entity in the UAE, at which point they may have to comply with local laws...
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