Many foreign nationals own U.S. real estate and hold title in their individual names. If title is held by husband and wife, it is typically held with right of survivorship. This means if one person on title dies, the other joint owner becomes the sole owner of the property by operation of law. Since the spouse is the survivor and automatically holds sole title to the property after the death of the joint owner, no probate proceedings are required.
Under this scenario, nothing needs to be done from a legal standpoint. However, this is not the case with respect to U.S. estate tax reporting.
The U.S. estate tax exemption for foreign nationals who are not domiciled in the U.S. is $60,000. This means that if the fair market value of the U.S. real estate owned by the deceased foreign national is valued at more than $60,000 at date of death, a U.S. estate tax filing is required. Even though the property is jointly owned, the full value of the property is subject to U.S. estate tax, unless the survivor can show evidence of furnishing separate consideration for the purchase of the property.
Most properties today are valued at well in excess of the $60,000 threshold, so most foreign nationals who own U.S. real estate in their personal names will be required to file a U.S. estate tax return if they die while still owning the property.
U.S. estate tax returns are required to be filed no later than nine months after date of death, at which time any estate tax due is payable. The filing of the return may be extended for a maximum of six months, but the extension of the filing of the return does not extend the time to pay the estate tax.
Even though a U.S. estate tax return is required to be filed for the decedent, this does not necessarily mean that estate tax will be payable if the fair market value at date of death exceeds $60,000. The U.S. currently has estate tax treaties with 14 countries. In addition, the income tax treaty between the U.S. and Canada contains provisions dealing with the U.S. estate tax. The provisions of each treaty are varied, but a significant reduction or elimination of the U.S. estate tax could result from the proper application of the provisions of the treaties.
Many foreign nationals are unaware of the requirement to file a U.S. estate tax return when a joint owner dies. It is not uncommon for the surviving spouse to learn of this requirement only upon the sale of the U.S. real estate, which can be many years after the death of the spouse. If a previous foreign national joint owner is deceased and a U.S. estate tax return has not been filed with the IRS, complications can arise that can affect the closing. For example, unpaid U.S. estate tax could result in a federal estate tax lien against the property. In many cases, the closing is allowed to take place, but the entire amount or a portion of the proceeds could be held in escrow until such time as the IRS issues a closing letter with respect to the estate, stating that the estate tax, if any, has been paid. Currently, it is not unusual for the IRS to take in excess of one year after the filing of the U.S. estate tax return to issue the closing letter, even if no U.S. estate tax is due. This means that the proceeds of the sale could be held in escrow and not released to the seller until well beyond one year after closing. In many instances, this could result in a hardship to the seller.
It is imperative that the U.S. estate tax return be filed as quickly after death as possible so that these complications can be avoided when the property is sold.