It was the best of times... and with a little planning, it won't turn out to be the worst of times.
Each year, you came from abroad in winter to enjoy Maui's beaches and great weather. On one of your extended stays, you met a real estate agent. You found the perfect condo. The next thing you knew, you owned it. You were still a resident and citizen of your home country, but suddenly owned real estate in the U.S. How will your tale turn out when you eventually pass your condo on to your loved ones?
The U.S. taxes the estates of all citizens and residents, as well as the U.S. assets of nonresident aliens ("NRAs"). The tax is imposed on the value of the estate assets, after certain exclusions and deductions are taken into account.
As of 2012, all U.S. citizens and residents are allowed an exclusion (we call it a "coupon") of $5.12 million. However, the coupon for NRAs is a measly $60,000. The 2012 tax rate, whether you are an NRA or not, is 35 percent.
An important catch is that your home country may want to tax your U.S. assets in addition to the U.S. estate tax. Your home country's tax may be an estate tax (in other words, primary responsibility for paying it falls on your estate), or it may be an inheritance tax (where primary tax liability falls on the recipients of your assets).
Either way, there may be double taxation by two different jurisdictions unless there is a treaty that eliminates double taxation--or unless you structure the transfer of your U.S. assets to your loved one in such a way that the transfer escapes some or all of the U.S. taxation.
Another approach might be to use life insurance to pay taxes and expenses after you are gone. This must be done carefully, but it is important to know there are tax-advantaged ways to use life insurance to make your passing easier on your loved ones' bank accounts.
Seeking the advice of experienced estate planning attorneys and tax professionals knowledgeable in international issues can help you find your way through the maze of double taxation.
Scott A. Makuakane and Roya J. Deyhim are estate planning attorneys with the law firm of Est8Planning Counsel LLLC. Contact Est8Planning Counsel LLLC at 891-8881 or www.est8planning.com.