General Parnership and Inheritance Taxes

[Gian Piero Bandieramonte]

Hi,

As I understand, the inheritance tax that a foreigner has to pay to inherit a property from another foreigner is 40% from the excess in the market value of $60k of the inherited rental property located in the US.

To mitigate this low exemption compared to US citizens, I am thinking of establishing a general partnership. Why? Please consider this example to express my point:

Let's suppose the rental property is purchased for $200k by 2 foreigners in a general partnership. They both are spouses and my parents. For simplicity, let's assume that on the moment of inheritance the property's market value is unchanged.

When the 1st of them dies I would inherit 50% of their share in their partnership, that is, $100k of the property's value. I would have to pay an inheritance tax out of the excess of $60k from that 50% share. That is, I pay 40% out of $40k = $16k.

Then I would become the new partner together with my surviving parent, owning 50%-50%.

When the 2nd of my parents passes away, and I get to inherit the 2nd half of the rental property, would again an exemption of $60k be applied on their 50% share of the partnership? That would make a total exemption of $120k. The total inheritance tax would be $32k.

This is in contrast to having to having one of my parents purchase the property as a sole proprietorship, where at the moment of death, a single exemption of $60k would be applied, making it an inheritance tax of 40%($200k - $60k) = $56k. The savings from the general partnership from inheritances taxes would be $24k.

Is this legally possible?

I could not find this info clearly anywhere on the internet.

Thank you.

[Lance Lvovsky]

Your scenario is certainly possible. I highly recommend you consult with a knowledgeable CPA in the area of international/cross-border taxation especially as it pertains to estate taxes.

You are correct - a nonresident alien is generally subject to an estate tax on their U.S. situs assets of 40% on the excess of $60,000. There are ways to mitigate this tax, by either using a double corporation strategy, discretionary irrevocable trust, or life insurance. 

Example: By creating an irrevocable U.S. domestic trust, a nonresident alien (NRA) may be able to exclude US situs real property from US estate taxes. The key to this planning technique is that the NRA may not retain any interest in the Trust. 

Another technique is the use of Corporations. Shares of stock issued by a foreign corp, regardless of the location in which the stock certificates are held, are not USA situs property. A foreign corp would own the shares of the US corp, which, in turn owns the US real estate. This is a good estate tax planning technique; however, do consider the income tax implications. This is also an expensive structure to maintain.

Life insurance may be your simplest and best option. As always, speak to your team of advisors before implementing any strategy (CPA, attorney, life insurance advisor [if applicable]).