Investing in the US and estate tax considerations

Monte Silver Photo: Herbert Bisko

Adv. Monte Silver explains the potential pitfalls of US estate tax and solutions for investors who are not US citizens.

Many non-US citizens living in Israel have invested in either US real estate, or stocks and bonds of US companies. As to real estate, investors are seeing their holdings appreciate nicely since the 2008 collapse, as well as generate a decent cash flow. As to securities, the markets are bullish with the NYSE reaching record highs. In both cases, these investors believe that now is not the time to sell. However, this puts the investor in a predicament: the more their US investments appreciation, the greater their exposure to US estate tax should they die.

To add to the complexity, Bank Leumi has recently sent letters to their customers who hold US securities through the bank stating that the bank may freeze all funds in the investment accounts upon death of the account holder, until proof of payment of US estate tax has been provided. It is common knowledge that non-US banks globally are sharing information with the US with regard to accounts of US persons. However, the Bank Leumi letter is the first time anywhere in the world that a bank has taken such a position, and become a withholding agent of the US for purposes of estate tax. And with the world getting smaller, and countries applying pressure on each other to share financial information, Bank Leumi's position may soon become standard.

First, what is the US estate tax? Estate tax is a tax imposed on a person at death. For non-American citizens living abroad, the tax rate is between 20%-40% of the value of the property, above $60,000, that the non-American citizen holds in US assets. For example, if a non-US citizen living in Israel dies holding US assets of $500,000, the tax is imposed on the amount of $440,000. The tax will be $135,400, or 27% of the value, regardless of the profit! (The tax rate is 40% for assets above $1 million). And the amount is due immediately after death, causing a potential cash-flow crunch.

US assets include things like US real estate (even if held in an LLC), and stocks and bonds in US companies. It also includes US treasury bonds, and index/spider securities.

How is a non-American investing in US assets to deal with this issue? There are several known solutions, none of them particularly good, and then there are more less known, yet good solutions. Known solutions include the following:

1. Sell the US assets, and remove the money from the US. This will work. However, as stated above, many investors do not want to sell their US assets now.

2. Buy life insurance to cover the estate tax. For example, if, at death, you own $500,000 in US assets , you will own $135,400 in estate taxes. The life insurance policy in this amount can fund the tax liability. The problem with the life insurance solution is that it is an added annual expense, which increases as the investor gets older. Not a great solution.

3. Gift the investments to children who will live longer. However as to real estate, the gift will generate immediate U.S. capital gains tax and a 40% US gift tax from the first dollar (i.e. without the $60,000 exemption and without graduated rates). And as to both real estate and securities, US law will ignore such transfers made within several years of death and apply estate tax.

4. Transfer the investments to an Israeli company owned by the investor. As stated in the previous example, immediate US capital gains will apply upon the transfer of real estate. And as to real estate and securities, the transfer will be ignored if made within several years of death. Furthermore, Israeli law may also apply tax at the time of the transfer.

Investors globally are drawn to the US. The real estate market is transparent and standardized. Investors can check the history of any property, as well as the prices of comparable properties in the area, all online. Companies such as IBM, General Motors, Google and Apple are trusted names whose securities are traded on trusted exchanges. The tax problem, however, is a cloud on an otherwise sunny investment sky. Solution 3 demonstrates the complexity of the US tax law while Solution 4 adds the issue of Israeli tax law. Good solutions are available for both new and existing investments, and should be considered.

The author is a US tax attorney at Israeli law firm Eitan Mehulal Sadot. He previously worked at the I.R.S. and the US Tax Court

Published by Globes [online], Israel business news - - on April 27, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

Monte Silver Photo: Herbert Bisko
Monte Silver Photo: Herbert Bisko
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