CEA International Estate Considerations 4 — Questions and Answers
Question 1: A non-resident alien decedent owned a US brokerage account containing corporate bonds and stock in a US company. Which asset is subject to US estate tax?
- Both the bonds and the stock
- The US corporate stock only (Correct answer)
- The corporate bonds only
- Neither, because non-resident aliens are exempt from US estate tax
Correct answer: The US corporate stock only
US corporate stock is US-situs property subject to US estate tax for non-resident aliens, while US corporate bonds are exempt as 'portfolio interest' under the portfolio debt exception.
Question 2: Under FATCA, foreign financial institutions (FFIs) must report accounts held by US persons to the IRS. What happens if an FFI does not comply?
- The IRS imposes a 50% excise tax on FFI profits
- A 30% withholding tax is imposed on certain US-source payments to the FFI (Correct answer)
- US persons are barred from holding accounts at the FFI
- The FFI is placed on the OFAC sanctions list
Correct answer: A 30% withholding tax is imposed on certain US-source payments to the FFI
Non-compliant FFIs are subject to a 30% withholding tax on withholdable payments from US sources, creating a strong incentive for compliance.
Question 3: A US citizen living abroad (expatriate) owns property in France and dies. Which factor is MOST critical in determining whether French inheritance tax applies?
- The expatriate's US citizenship status
- The location (situs) of the French property and the decedent's French tax residency (Correct answer)
- Whether the beneficiaries are US citizens
- The existence of a French will
Correct answer: The location (situs) of the French property and the decedent's French tax residency
France taxes inheritance based on the situs of the property and/or the domicile of the decedent or heirs, making these the most critical factors.
Question 4: What is 'estate tax situs' as it relates to intangible personal property owned by a non-resident alien?
- Intangible property is always taxed in the country where the owner resided
- Intangible property situs is generally determined by where the issuing entity is domiciled or incorporated (Correct answer)
- Intangible property has no situs and is never subject to US estate tax
- Intangible property situs follows the physical location of the paper certificate
Correct answer: Intangible property situs is generally determined by where the issuing entity is domiciled or incorporated
For estate tax purposes, the situs of intangible property such as stock is typically the state or country where the corporation is incorporated or domiciled.
Question 5: A client renounces US citizenship to avoid future US estate and gift taxes. Which law imposes an exit tax on certain long-term residents and citizens who expatriate?
- The American Jobs Creation Act of 2004
- The Heroes Earnings Assistance and Relief Tax Act (HEART Act) of 2008 (Correct answer)
- The Foreign Account Tax Compliance Act (FATCA) of 2010
- The Tax Cuts and Jobs Act (TCJA) of 2017
Correct answer: The Heroes Earnings Assistance and Relief Tax Act (HEART Act) of 2008
The HEART Act of 2008 (IRC Sections 877A and 2801) imposes a mark-to-market exit tax on covered expatriates and a tax on US persons who receive gifts or bequests from covered expatriates.
Question 6: Which planning structure is most effective for a foreign national who wants to hold US real estate and minimize US estate tax exposure upon death?
- A US revocable living trust
- A foreign corporation that owns the US real property (Correct answer)
- A US limited partnership with the client as general partner
- A US testamentary trust funded at death
Correct answer: A foreign corporation that owns the US real property
Holding US real property through a foreign corporation can convert a US-situs asset into a foreign-situs asset (shares of a foreign company), reducing US estate tax exposure for non-resident aliens.
Question 7: A US decedent's estate includes a 40% interest in a foreign partnership. How is this interest classified for US estate tax situs purposes?
- US-situs, because the decedent was a US citizen
- Determined by the location of the partnership's underlying assets
- Foreign-situs, regardless of the underlying asset locations (Correct answer)
- Exempt from US estate tax as a passive foreign investment
Correct answer: Foreign-situs, regardless of the underlying asset locations
Partnership interests in foreign partnerships are generally treated as foreign-situs intangible property for US estate tax purposes, regardless of where the partnership's assets are located.
CEA International Estate Considerations 4
A non-resident alien decedent owned a US brokerage account containing corporate bonds and stock in a US company.
Which asset is subject to US estate tax?