U.S. Estate Tax and Residents of Switzerland
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 2022, the exemption was increased to $12,060,000. 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 $12,060,000. 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 a $12,060,000 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.
Residents of Switzerland have significant advantages over residents of other countries due to the favorable provisions contained in the estate tax treaty between the U.S. and Switzerland. They are allowed a pro-rata portion of the credit afforded to U.S. citizens and domiciliaries based upon the value of their U.S. assets to their worldwide assets. This credit is known as the “unified credit.”
The following example shows how the U.S. estate tax is calculated on the estate of a Swiss resident. All values are stated in terms of U.S. dollars.
A Swiss resident dies in 2022 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 $12,060,000 (Unified Credit)||$4,769,800|
|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 ($4,769,800 x 10% = $476,800 limited to the actual amount of estate tax of $345,800)||$(345,800)|
|U.S. Estate Tax Payable||$0|
Residents of Switzerland with worldwide assets in excess of $12,060,000 may still have planning opportunities available to them. For example, instead of taking title in their individual names, they could take title of the U.S. real estate in the name of a non-U.S. corporation. Upon their death, the value of the shares of the corporation would not be subject to U.S. estate tax. However, the disadvantage of this is that the corporate income tax upon sale of the property could exceed the U.S. income tax due had the property been held in their individual names. This difference has substantially diminished as the federal corporate income tax rate is a flat 21%, effective January 1, 2018.
About the Author
Renea M. Glendinning, CPA, Shareholder, joined the firm in 1987 and has led the International Tax Department since 1996. She has authored articles regarding various international tax issues and frequently gives presentations on U.S. income and estate taxation of foreign nationals doing business in the U.S.