Plan now for US estate tax changes

Scott Bakal  credit: GT
Scott Bakal credit: GT

US citizens, Israelis with children in the US, or who own assets there, are among those who may be affected by imminent changes in US tax law.

The importance of US tax planning cannot be overstated, as it serves as a critical tool in navigating the complex terrain of estate taxes and protecting the hard-earned wealth of individuals and families, especially in complex cases, where the family has contacts with two countries: both Israel and the US. This is even more important to consider, due to US estate tax changes set to take effect in 2026.

If you are an Israeli family that owns US properties, an Israeli family with children living in the US who are dual US citizens or just US citizens, an Israeli resident who will inherit assets from US family members, or a family residing in Israel with one spouse who is a US citizen and the other spouse who is a dual citizen, the changes in US estate tax set to take effect in 2026 are likely to affect you.

Currently, a US citizen or an Israeli citizen who is permanently residing in the US can give away $13.61 million free of gift tax or estate tax. Unless there is a change in tax law before 2026, after 2025, the maximum amount that a US citizen or an Israeli citizen permanently residing in the US can give away tax free will likely be limited to approximately $7 million (indexed each year for inflation). Further, Israeli citizens who are not living in the US or who are living in the US but not on a permanent basis can only give at death $60,000 of US assets before US estate tax is due.

If a person is a US citizen or permanently residing in the US and the person’s estate will likely exceed $7 million by 2026, the right tax planning, such as forming a trust and transferring the assets into the trust before 2026, will allow that person to secure their assets and transfer them to their loved ones while minimizing if not eliminating US estate tax. At the same time, lifetime gifts of US financial assets held by Israeli citizens who are not permanently residing in the US are exempt from US gift tax, even though the same assets, if held until death, will trigger US estate tax.

It's important to do the right planning before the end of 2025 to use the lifetime $13.61 million exemption.

What is the best way to ensure wealth transfer?

In the US, when someone passes away, there is up to a 40% estate tax for US purposes. Additionally, there might be an additional state estate tax, in states which include New York, Massachusetts and Illinois.

Further, if a person’s children inherit assets directly instead of through trusts, the inherited assets can trigger estate tax for the person’s children and their descendants. On the other hand, if the trust is properly structured, US recipients of the assets can potentially be exempt from estate taxes forever.

Of course, US estate tax rules must take into account how Israel taxes trusts which have an Israeli beneficiary.

I live outside the United States. When I pass away, I'm going to leave my assets to a trust outside the US - am I exempt from paying US estate tax?

If your assets would be subject to US estate tax if you left them to a US person or trust, they will still be subject to estate tax if the assets are left to a non-US person or a non-US trust. Also, under the punitive tax rule known as the "throwback tax," if a US person is a beneficiary of a non-US trust that accumulates its income, extremely adverse US income tax consequences can arise. Therefore, it is crucial to understand how to plan appropriately if someone has created such trusts, ensuring that the penalty tax can be minimized or even potentially eliminated when the US person receives accumulated income from the trust.

I own shares of an American company that I wish to leave to my children.

If you're a non-US citizen who is not permanently residing in the US and you own US property, you only get a $60,000 exemption from estate tax, even if you are leaving your assets to non-US family members. So technically, every Israeli who owns more than $60,000 of stock in US companies such as Apple or Amazon could have a US estate tax liability. There are techniques, using trusts created during a person’s lifetime or Israeli family companies, that can enable an Israeli to minimize or possibly even eliminate exposure to US estate tax.

I am an Israeli resident (and not a US citizen) who works for an Israeli start-up company which was purchased by an American company. I have shares that I want to leave to my children.

Section 102 of the Israeli Income Tax Ordinance provides benefits to Israeli residents who receive stock of their employer if the employer retains the shares and pays over tax when the stock is sold. However, an Israeli resident holding stock in a US company is only entitled to a $60,000 US estate tax exemption. Many Israeli residents holding 102 stock in a US employer could end up owing estate tax upon their passing. While section 102 stock is generally subject to transfer restrictions, special planning may be available in certain situations to allow an Israeli resident to minimize or possibly even eliminate US estate tax even when the shares cannot be transferred.

What can an Israeli resident or a dual US-Israeli do right now?

1. Choose a law firm that will be situated to do the necessary planning and that deals frequently with the tax issues of dual US-Israeli taxpayers who have substantial US assets.
2. Start planning now. People who wait until the middle or end of 2025 may find that there is not enough time to implement optimal tax saving strategies.
3. Discuss with your tax advisor the advantages of lifetime gifts, and the best way to make lifetime gifts.
4. Think not only about your estate tax exposure but also what exposure you are creating for your descendants.
5. Take the time to create a comprehensive tax plan that not only minimizes taxes but aligns the tax saving strategies with your goals and values, and sets forth a framework for how your family will handle its financial legacy in the future.

By taking proactive steps today, you can ensure a more secure and prosperous (and a more tax-free) future for your loved ones and also leave a lasting legacy that extends far beyond your time.

The author is a shareholder in Greenberg-Traurig (GT), an international law firm with offices in 47 locations, including Tel Aviv.

Published by Globes, Israel business news - - on March 5, 2024.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.

Scott Bakal  credit: GT
Scott Bakal credit: GT
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