If you're a non-resident alien (NRA) with assets in the United States, real estate, stocks in U.S. companies, interests in U.S. businesses, there's an estate tax trap that catches families by surprise: the federal estate tax exemption for NRAs is just $60,000.

For context, U.S. citizens and residents get an exemption of $13.61 million (2024). The NRA exemption is less than half a percent of that.

What's Taxable

U.S. estate tax applies to an NRA's "U.S.-situs" assets, which include:

  • U.S. real property (the big one)
  • Stock in U.S. corporations
  • Tangible personal property located in the U.S.
  • Certain partnership interests and business assets

The estate tax rate is graduated up to 40%. On $5M of U.S. real estate, the estate tax liability after the $60,000 exemption is approximately $1.9 million.

A Canadian investor with $5M in California real estate faces approximately $1.9M in U.S. federal estate tax, plus potential California inheritance tax. Without planning, the family could lose nearly 40% of the U.S. assets at death.

Treaty Relief

The U.S. has estate tax treaties with several countries, including Canada, the UK, Japan, and Germany, that can significantly increase the effective exemption. The U.S.-Canada treaty, for example, provides a pro-rata share of the full U.S. exemption based on the ratio of U.S. assets to worldwide assets.

For a Canadian with 30% of their worldwide estate in U.S. assets, the treaty exemption could be approximately $4M instead of $60,000, a dramatic improvement.

Structural Solutions

For NRAs with significant U.S. assets, structural planning is essential:

  • Offshore holding companies: Holding U.S. real estate through a foreign corporation can remove the asset from the NRA's U.S. estate, though this creates FIRPTA and branch profits tax complications
  • Life insurance: Life insurance proceeds paid by a foreign insurer to a foreign beneficiary are generally not U.S.-situs assets
  • Debt structures: Reducing the net equity of U.S. assets through legitimate indebtedness can lower the taxable estate value
  • Lifetime transfers: Gifts of intangible property (like LLC interests structured correctly) may not trigger U.S. gift tax for NRAs

California Layer

California does not currently impose a state-level estate or inheritance tax. However, California income tax on the sale of inherited property, including the absence of a state-level step-up in basis for certain assets, can create unexpected tax bills for heirs.

The $60,000 NRA exemption is not a planning detail. It's a structural risk that can transfer 40% of your U.S. assets to the IRS at death. If you're a non-resident with U.S. real estate or business interests, this is the first thing to address.

This article is for general informational purposes only and does not constitute tax, legal, or investment advice. Business owners should consult qualified tax and legal advisors before entering into a transaction.