Cross-border wealth planning can be more complicated for families who reside and work in different countries. If you are not a citizen or resident of the US, you may have to pay US wealth transfer taxes (federal gift, estate and generation-skipping transfer taxes) when you transfer assets to US recipients, such as your children or grandchildren. The following techniques may help reduce the tax burden.
Non-US persons may not be subject to US estate tax, but their children in the US likely will be
You are not liable for US estate taxes if you are not a US person, meaning you do not have citizenship or residency in the US, unless you transfer assets that are considered to be located in the US.
But even if your assets are not subject to US estate tax, you may still need to plan for them since these taxes could impact your US-based beneficiaries in the future. If you transfer assets directly to your children in the US, those assets become part of their taxable estate for US estate tax purposes. You are effectively bringing those assets into the US estate tax system, and currently a 40% estate tax will be imposed on any amount in your children’s estate that exceeds the US federal estate tax exemption. Some states impose additional state-level estate tax, so the impact could be even greater.
In 2024, the federal estate tax exemption is $13.61 million per person, so you can pass up to that amount to your heirs without paying any federal estate tax. This tax-free exemption amount is scheduled to be reduced significantly in 2026 when it reverts to the previous Tax Cuts and Jobs Act (TCJA) level. Unless there is new tax legislation, the inflation-adjusted estate tax exemption is anticipated to land at around $7 million, effective January 1, 2026. The current top 40% rate for the gift and estate tax is also scheduled to rise to 45% in 2026.
Transferring assets to a trust for your US beneficiaries
One of the best ways to avoid future US estate taxes for any US-based children and grandchildren is to leave the assets in a trust instead of transferring the assets to them directly. Children and grandchildren in the US will be subject to US estate tax on their worldwide assets so they are not in the same position as you to protect your assets from future US estate taxes. By creating a trust, you can keep assets out of their estates and avoid future estate taxes for as long as the assets are held in trust for their benefit.
A trust can complement your will in your home country and potentially serve as your main vehicle of wealth transfer. You can design the terms that define how and when your beneficiaries gain access to the trust assets. If your trust is revocable, you retain control over the trust while you are living, and you can change or revoke it at any time. The main condition is that any US beneficiaries must have limited access or control over the trust property to avoid it from being subject to the US estate tax when the beneficiary passes away.
How to benefit future generations
A strategy to consider if you want to make immediate gifts to US-based family members is to utilize a long-term, irrevocable “dynasty” trust. If funded with intangible personal property such as mutual funds, stocks or bonds, no gift tax would be imposed when the trust is created. The trust interests created for the family members would not be subject to taxation in their estates. In addition, as successive family generations enjoy the benefits of the trust, trust assets would not be subject to the generation-skipping transfer tax.
Beyond estate taxes: Consider creating a foreign grantor trust for income tax benefits
A “foreign grantor trust” is a foreign trust for US income tax purposes and is only subject to US income tax on certain defined categories of US-source income such as dividends from US stock or interest. Capital gains are generally exempt from US taxation if you are a non-US person. With a “grantor trust,” you, not the trust, own all income and any non-exempt gains produced by the trust. You are responsible for any US income tax reporting or payment on any US-source income. A properly structured trust likely will not produce any US income tax except for US withholding on any US-source income. If the trust will have US beneficiaries upon your death, it may be designed to become a US taxpayer and will report and pay income tax just like your beneficiaries would have to do if you had instead left the assets directly to them. It offers the same estate tax benefits as a non-grantor trust.
The challenges of owning and transferring US real estate
One of the most common challenges is transferring US real estate, which is subject to both US income tax and to federal estate and gift taxes. Non-citizens can often eliminate estate tax exposure by setting up a trust or non-US holding company to buy the property and name family members as beneficiaries.
Several factors come into play, such as if and how long you plan to live in the US and if any US children will use the US property. The longer you own the property and the longer the property will be held by US persons weighs in favor of funding a US trust to purchase the US real estate. This way, there should never be a US gift or estate tax, and the capital gains rules apply only when the property is sold.
One option is the use of “directed trusts,” which permit separation of the responsibility for the management of some or all the assets from the administrative responsibilities of the trustee. This may be important to families who have a mixture of complicated assets, such as real estate, a family business or a range of investment managers.
Getting the right guidance
Because laws are ever-changing and nuanced, we recommend seeking the guidance of an attorney experienced with international estate planning issues for your specific circumstances to help navigate the laws surrounding cross-border planning.
Charles R. Johnson, Wealth Director, Fiduciary Trust International is responsible for developing investment and trust relationships with families and organizations. He works closely with the Trust and Tax planning group to help clients determine optimal asset allocation and transfer strategies.
This material should not be construed in any way as investment, tax, estate, accounting, legal or regulatory advice. Any description of tax consequences set forth above is not intended as a substitute for careful tax planning.