Effective January 1, 2018, the Tax Cuts and Jobs Act granted U.S. citizens and domiciliaries an exemption of $11,180,000 with respect to U.S. estate tax for decedents dying in 2018. In 2020, the exemption was increased to $11,580,00. This means that individuals subject to the U.S. estate tax on the value of their worldwide assets do not pay U.S. estate tax unless the value of those worldwide assets exceeds $11,580,000. In addition, an unlimited amount can pass to the U.S. citizen surviving spouse free of estate tax.
Individuals who are not domiciled in the U.S. can also be subject to U.S. estate tax. However, their estates are subject to estate tax on U.S. assets only, not worldwide assets. Instead of receiving the benefit of an $11,580,000 exemption, they are entitled to an exemption of only $60,000. Effective January 1, 2013, the U.S. estate tax rates start at 18% and increase to a maximum of 40% on property valued at $1,000,000 and above. There is no automatic exemption for property passing to the spouse, unless the surviving spouse is a U.S. citizen, which is rarely the case.
While the U.S. is generally regarded as somewhat of a tax haven in terms of its income taxes, the estate tax on nondomiciliaries can be onerous. To illustrate the severity of the tax, property valued at $500,000 would result in a U.S. estate tax of $142,800. This is payable to the IRS no later than 9 months after date of death and, if not paid timely, is subject to penalties and interest, which would be added to the estate tax.
German residents have significant advantages over residents of other countries due to the favorable provisions contained in the estate tax treaty between the U.S. and Germany. Under the treaty, if a German decedent bequeaths the U.S. property to his or her German surviving spouse, 50% of the value of the property is excluded from U.S. estate taxation. In addition to this 50% exclusion, the German decedent’s estate would receive a deduction of up to $11,580,000 (for deaths occurring in 2020) on the remaining value of the U.S. property. If any taxable amount remains after the application of the marital exclusion and the marital deduction, the estate is allowed a pro-rata portion of the credit afforded to U.S. citizens and domiciliaries based on the value of their U.S. assets to their worldwide assets. This credit is known as the “unified credit.”
The following examples show how the U.S. estate tax is calculated on the estate of a German resident. All values are stated in terms of U.S. dollars.
An unmarried German resident dies in 2020 owning U.S. real estate valued at $1,000,000 and a worldwide estate valued at $10,000,000. No estate tax is due, calculated as follows:
Value of U.S. Estate $1,000,000
Value of Worldwide Estate $10,000,000
Percentage of U.S. to Worldwide 10%
U.S. Estate Tax on $11,580,000 (Unified Credit) $4,577,800
U.S. Estate Tax on $1,000,000 $345,800
Calculation Of U.S. Estate Tax
U.S. Estate Tax on U.S. Assets Valued at $1,000,000 $345,800
Maximum Unified Credit ($4,577,800 x 10% = $457,780, limited to the actual amount of estate tax of $345,800) (345,800)
U.S. Estate Tax Payabl $0
Even though the estate of a nondomiciliary does not get the advantage of the unlimited deduction for property passing to his or her spouse (unless the spouse is a U.S. citizen), the German resident does receive a marital exclusion and a marital deduction.
A married German resident dies in 2020 owning U.S. real estate valued at $1,000,000 and title to the U.S. real estate passes to the German spouse. No estate tax is due, calculated as follows:
Value of U.S. Estate $1,000,000
Marital Exclusion of 50% (500,000)
Marital Deduction (maximum of $11,580,000, limited to amount remaining) (500,000)
U.S. Estate Tax Payable $0
As shown in the examples, a German resident who dies in 2020 leaving his U.S. property to someone other than his or her German spouse will not have any U.S. estate tax to pay if the value of the worldwide estate is $11,580,000 or less. A German resident who leaves U.S. property to his or her German spouse can have a worldwide estate valued at significantly more than $11,580,000 and still not owe any U.S. estate tax.