As many Irish investors typically have large exposures to US shares in their investment or pension accounts, we are frequently asked: what is the potential exposure to US Federal Estate Tax (FET) on US investments in these accounts on death? And while the overriding message is always that tax should not dictate the investment objective, here we have sought to address the most frequently asked questions raised by Irish investors in relation to the potential exposure to US FET on US shares.
Before we get started, it is worth mentioning that it is not just the US that seeks to tax US shares in the manner described below, other countries may have similar rules in relation to shares located in such countries but given the number of queries we receive from investors with assets exposed to US FET, this Q&A will focus on the US rules.
What is the main difference between how US Federal Estate Tax and Irish Capital Acquisitions Tax operate?
One of the main differences between US FET and Irish Capital Acquisitions Tax (CAT) is that US FET is charged on a deceased person’s estate once the relevant tax exemption amount is exceeded. Whereas Irish CAT does not arise on the value of a deceased persons estate, it instead arises on the value of the inheritance received by a beneficiary once the beneficiary’s relevant lifetime tax-free threshold has been fully utilised.
The US charges FET on all the assets in a deceased person’s estate if that person was a US citizen, held a US passport or a US green card on the date of death, once the value of the estate exceeds a threshold amount, which in 2022 is $12,060,000. However, in the case of non-US citizens, passport holders or green card holders, which would be many Irish estates, the US charges FET on US situs assets (that is, US located assets) only, once the value of the US assets in the estate exceeds $60,000. Thereafter, FET applies at a 40% rate.
As we have mentioned, Ireland charges CAT on the value of an inheritance that a person receives, once their relevant lifetime tax-free threshold has been fully utilised. In the case of an inheritance that a child receives from their parent, the lifetime tax-free threshold is currently €335,000.
How does US FET typically arise in an Irish person’s estate?
US FET typically arises in Irish estates where the level of US assets in the estate is in excess of $60,000. US assets include US real estate, shares in US corporations, interests in US mutual funds and US ETFs, and so on.
Given that many Irish investors own US assets with a value greater than $60,000, US FET is likely to become an issue for their executors to consider.
Who is responsible for settling the US FET exposure?
Where a US FET liability arises, it is the executors’ liability to settle any amount due. If they do not, the US tax authorities (IRS) could look to the executors personally, the beneficiaries of the estate or even the custodian of the US assets to settle the tax due.
The normal due date for filing and paying the tax is nine months following the date of death. Late filing and payment can incur penalties.
Is there an exemption from US FET for inheritances between spouses?
While an exemption from US FET may apply in the case of an inheritance between two US spouses, an exemption is not available if US assets pass between a US spouse and his/her non-US spouse or between two non-US spouses. As a result, where US assets pass from an Irish person to their spouse, US FET would typically arise on the value of US assets in the estate above the $60,000 threshold, at a 40% rate.
Is there relief from double taxation where US assets are subject to US FET and Irish CAT?
Where a deceased person’s estate is subject to US FET in respect of US assets and an inheritance of the same assets from the deceased person’s estate is also subject to CAT in Ireland, relief from double taxation may be available under the Ireland-US Estate Tax Treaty.
While US FET may arise on an inheritance of US assets between spouses, from an Irish tax perspective, inheritances between spouses are exempt from CAT and as a result, double taxation relief would not be available.
Where a child inherits US assets from a parent and US FET arises, the child should be in a position to obtain credit against their CAT liability for the US FET incurred (assuming the child’s parent-to-child tax-free amount has previously been fully utilised).
I’m concerned about the level of Irish and US taxes that may be due on my death, is there any advance planning I should consider to minimise the impact for my estate and beneficiaries?
1. Leaving US assets directly to children
The default position for many Irish married couples and civil partners is to leave their estate in full to the surviving spouse/civil partner in the first instance and thereafter to leave the estate to their children. In such cases, there can be an exposure to US FET on the death of the first spouse (where the estate holds US assets in excess of $60,000) and there can be a subsequent exposure to US FET on the death of the second spouse (again, where the estate holds US assets in excess of $60,000).
For example, where an Irish investor has US assets with a value of $1m and leaves these assets to his/her spouse, a US FET charge of c. $376k would arise on the US situs assets in his/her estate (after accounting for the $60,000 tax-free amount), the surviving spouse would therefore receive US assets of c. $624,000. Where the surviving spouse then leaves the net amount of US assets of c. $624,000 to the children, a US FET charge of $225,600 would arise in the estate (after accounting for the $60,000 tax-free allowance), the children would therefore receive US situs assets of c. $398,400.
Where the intention is for the US assets to ultimately be left to the children, parents could consider leaving their US assets directly to their children on their passing, rather than leaving the US assets to the surviving spouse. Using the example above, where a parent leaves US assets of $1m to their child, a US FET charge of c. $376k would arise (after accounting for the $60,000 tax-free amount) and the children would then be left with a net amount of c. $624,000. Additionally, the children should be in a position to obtain credit against their CAT liability for the US FET arising (assuming the children have previously fully utilised their CAT tax-free threshold).
Currently, investors could also consider lifetime gifting to take advantage of lower asset values to utilise a child’s tax-free threshold. However, other taxes would need to be considered in this situation such as CGT.
2. Non-US situs investment products
As it is the situs (location) of an asset that determines whether an asset is within the scope of US FET, investors often prefer to invest in non-US investment products, such as Canadian or EU-domiciled investments products, even ones which invest in shares or bonds of US corporations. While such investment products may not give rise to a US FET exposure, the tax implications in the country of domicile of the investment product would need to be considered. For example, some countries may impose CGT or other transaction charges on the transfer of an investment located in that country on death.
In addition, where investors consider, for example, investing in funds located in an EU country that are subject to Irish funds tax (currently charged at 41%), death gives rise to a funds tax charge. This tax charge on death is allowed as a credit against CAT payable by the beneficiary (subject to conditions and assuming the beneficiary would incur CAT on the inheritance).
3. Non-US Corporations & Non-US Partnerships
Where investors hold US assets, such as shares in a US corporation, in a non-US corporation, it is likely that in this situation it would be the shares in the non-US corporation that are passing on death rather than the underlying investments held in the US corporation. As a result, US FET should not arise.
Similarly, investors may also hold US assets in a non-US partnership. In this situation, it may be an interest in a non-US partnership passing in an estate, rather than the shares in a US corporation that the partnership may be invested in. However, given the generally transparent nature of partnerships, it is unclear if the IRS would seek to look-through the non-US partnership such that US FET would be due.
Does holding US shares or other US investments through an Irish nominee remove the exposure to US FET?
A nominee arrangement may be in place for holding such shares. This should not be viewed as a basis on which US FET would not be due as the asset's ultimate beneficial owner remains the individual.
What are the US FET implications where a person holds US assets in their Approved Retirement Fund (ARF)?
Where a person holds US assets through an ARF, because this asset is generally treated like a personal investment asset of the beneficial owner, a US FET exposure may arise on the death of the ARF holder where the ARF holds US assets in excess of $60,000.
What are the US FET implications where a person holds US assets in other pension structures?
Where a person holds US assets in Irish pre-retirement pension vehicles (e.g., an occupational scheme), given their structure and the nature of how benefits are paid on death, no US FET exposure should generally arise on the death of the pension holder.
How can Goodbody help?
If you are in doubt about the amount of taxes an estate or beneficiary will face in the event of death, get advice. After all, because of the interaction of the investment objective and the tax rules across multiple jurisdictions, it is an area that requires careful consideration.
By undertaking a review and identifying any planning that can be done, it will not only ease your worries by giving you peace of mind, but it will also make it easier for those left behind.
If you would like to have a discussion with a member of our team, please contact your Goodbody representative today.
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