Understanding US Estate Duties

 

    Many global investors seek to include exposure to US assets (especially US equities) as part of their portfolios, but do so without the due-care required when dealing with cross-border investments. Too many investors inadvertently end up owning US-situs assets (US stocks, US ESOPs, Real Estate etc), exposing their wealth to a substantial 40% estate duty tax, dramatically reducing the amount of wealth passed down to their beneficaries.  

 

    The first section of the whitepaper, focusses on helping investors gain a deeper understanding of US Estate Duties - what they are, what assets they apply on and whether there are there any exceptionson the same.  

 

Wealth Destruction + The operational nightmare of compliance

 

    While many investors are aware of the 40% US Estate Duty Tax, most are not aware of the sheer operational complexity involved in the estate settlement process in the US. From frozen custodian accounts, the potential need to hire a US attorney, strict timelines for tax assessment & payments (with sharp penalties for delays), and the long wait for the IRS to issue a transfer certificate - beneficaries are looking at a min of 1-3 years before they can expect to get back their inheritance, with complex & expensive operational processes to be followed.  

 

    Arguably, the biggest problem however arises from the huge MTM (mark-to-market) risk, that timing mismatches between Estate tax finalisation, tax payment and the final settlement of accounts by custodians, exposes beneficaries to. In a declining market, MTM risk can lead to the actual effective duty rising from 40% to upto 100% of total assets - a risk most investors continue to be unaware of.  

 

Non-compliance is really not an option

 

    Many investors have been given extremely wrong & dangerous advice, that in the case of death, beneficaries should just sell and transfer back the money to their home countries (with a mistaken belief that this can help avoid estate duties). The legal implications of any such move is massive - providing a clear auditable trail that the US IRS can use to prove active intent for tax-evasion & tax fraud (exposing beneficaries to upto 8 years in imprisonment), along with rapidly balooning fines & penalties (2-3x of the original tax owed).  

 

    Importantly, rapidly rising cross-border information sharing agreements, the existence of a automatic lein mechanism that converts an estate liability into a beneficary liability, and a host of cross-border enforcement mechanisms, makes this a very real risk that no sensible investor would wish their beneficaries to bear.  

 

Proper stucturing provides easy solutions and helps avoid this risk all-together

 

Importantly, a little careful due-diligence at the time of investing, can help investors gain access to US markets - without them getting any exposure to US-situs assets. All the complexity & wealth destruction linked to compliance, or the humongous criminal & monetary liabilities linked to non-compliance, are extemely easy to avoid by just using the right route to build US market exposure.