US Australia estate tax treaty

{Note from mods - this thread split from here: Listed Investment Companies (LICs) 2019 [LIC & LIT]}

U.S. Australia Estate Tax treaty

I think it's $11M for a couple

If its a simple portfolio the estate process for the idiot grandson could be convoluted i.e. finding and filing a Form 706NA with the IRS (even though no tax is due) and then obtaining a Federal Transfer Certificate.

A medallion signature guarantee is a special signature guarantee for the transfer of securities (can be obtained from Computershare and Fortrend)

The Grandson will need to liaise with the IRS directly:

General Info

The actual form:

Instructions to complete/where to file:

On the cross-listing issue of VTS & VEU thanks to Vanguard for this also

 

I have been figuring that in time Vanguard would domicile the funds in oz and this negative of having VTS and VEU would be removed. Otherwise I was looking at maybe putting future international investments into other ETFs.

Glad to hear there are plans afoot.

 

Implications if the US domiciled funds are held in a discretionary trust? Or in an SMSF?

 

Does this mean a stockbroker will need these forms to transfer say VTS shares from a deceased estate to beneficiaries?

 

Depends on value

 

Found this https://www.vaneck.com.au/globalass...k-cdi-supplementary-pds---30-august-final.pdf

Investments held in a self-managed superannuation fund (SMSF) do not form part of a member's estate when the member dies. CDIs held in a SMSF will therefore not be subject to this tax.

 

Interesting. It would be worth understanding any implications of the smsf trustee determining the members estate to be the beneficiary (either via a binding directive of the smsf deed, or as a dicretionary decision) - Eg.does US estate tax then come into play if the super death benefits are payed to the estate of the member?

Of course the trustee could pay directly to beneficiaries but it's often desirable to be able to utilise TDTs in the members Will.

Or maybe I'm over complicating it.

 

SMSFs warned on hidden estate tax

 

According to wikipedia the cap doubled in 2017 and is currently around AUD $15m (USD 11.7m)
Estate tax in the United States - Wikipedia

I don't think Mrs Hockey Monkey and I will run into this problem, particularly if super is treated separately.

 

@Hockey Monkey, @ChrisP73 Any further thoughts on this?

My reading is that the SMSF trust structure shelters assets from the US estate tax. Probably wouldn't be a good plan to try and transfer a US asset in-species as part of a death benefit to the estate but selling in the trust and paying cash from the proceeds to an estate should be fine.

My reluctance to hold US domicile in SMSF is nearly overcome but I would like a little more clarity if I could find it.

 

Personally, I'd feel more comfortable if I could find additional information to confirm this (I've looked!) or some independant legal/tax advice. I'm not going to investigate further however, as unlikely to be a concern for me/us. I'll stay interested however as goverments have a habit of changing the law!

Yes, agree. When I posted above I was thinking about in-species transfer as part of a death benefit either to beneficiary, estate or possibly directly to a TDT (although not even sure if that can be achieved via a super trust deed). As you've pointed out through, probably a bad plan - and given liklihood of 10% CGT on capital gains on bulk of accumulation account balances - it would be preferable for the trustee to sell US domiciled assets an then distribute death benefits. (Although if the balance was only slightly above the threshold with majority unrealised capital gain there may not much difference - Australian CGT vs US estate tax - but hopefully the trustee would be sensible enough to support the Australian taxpayer vs Uncle Sam).

On the threshold:
A Guide to the Federal Estate Tax for 2021 - SmartAsset

For 2021, the threshold for federal estate taxes is USD11.7 million, which is up slightly from USD11.58 million in 2020. For married couples, this threshold is doubled, meaning they can protect up to $23.4 million in 2021.
If your estate is worth USD11.7 million or less, you don’t need to worry about the federal estate tax. However, any estates worth more than that are taxed only on the amount that surpasses the USD11.7 million threshold. For most of the federal estate tax tiers, you’ll pay a base tax, as well as a marginal rate. Current federal estate taxes max out at 40% for taxable amounts greater than USD1 million.
​

 

I've not found anything more official than the vaneck link above. Lots of references to trusts being used to avoid estate tax which makes sense given Australian ETFs are trusts as well which would fill in their own W-8BEN-E form

 

I don't know if this case has been finalised or not or if it is relevant to what you are seeking to do but it's still interesting. The article is only two years old.

Dixon case could see super taxed in US

Edit: It may have been resolved.

Dixon: A Cautionary Case of U.S.-Australian Tax Issues - Rigby Cooke Lawyers

 

Yes it is possible

Legal Tip 343: Death and SMSF Property passing to Individuals Legal Tip 343: Death and SMSF Property passing to Individuals

 

That looks way more complicated than my simple VAS/VTS/VEU Australian tax payer situation

 

@Terry_w I was actually meaning an in species transfer from the smsf to a TDT established by the smsf trust deed on death of a smsf member. In other words bypass the members estate. The bit that I wasn't sure about is the feasibility of creation of a TDT (in effect) from a smsf trust deed on the death of a member. I just made it up.

 

Agree. Interesting read though. It seems Australian superannuation trusts and smsfs in particular are a bit of a mystery to the united states.

 

A TDT can only be made by will and the SMSF trustee can only pay a dependent or the LPR of the dead member. So I don't see how it would work.

 

Also consider what might happen if you or one of your heirs would move abroad. This 3rd country may or may not have an estate tax treaty with the US, and if so the terms may be quite different to the Australia - US treaty. Personally I would avoid owning stocks/ETFs that are domiciled in the US, even when an Australian tax resident. Yes the treaty might protect you/your heirs from estate tax, but what is the cost and hassle of processing this?

For EU residents and/or citizens or those with assets located in the EU there is another interesting twist:

Planning your cross-border inheritance in the EU

You can choose the law of your country of nationality to apply to your inheritance

Your inheritance also know legally as succession will usually be handled by an authority - often a court or a notary – in the EU country where you last lived. This authority will in most cases apply its own national law to your inheritance.


EU rules however allow you to choose that the law of your country of nationality should apply to your inheritance – whether this is an EU country or not.


If you have several nationalities, you can choose the law of any of your nationalities.


You should express your choice of law explicitly and clearly, in a will or in a separate declaration. Your will or declaration will be considered valid if it meets the requirements of:

• the EU country where you last lived, or
• the law of your country of nationality, if you so choose.

 

The other thing to consider is that if you have significant holdings of US (or other international) domiciled funds/shares/property in an accumulation account you could take a risk managed approach and look to progresively sell down some or all of these as the risk of future demise increases (either due to age or other conditions). This could even be done prior to reaching a condition of release. Once you've met a condition of release you could then also tactically draw out some funds from super and hold personally, gift, or gift/loan to other structures which you may or may not have some control over - this would mitigate some risk of super death benefits tax. Paying CGT at 10% isn't too bad really - particularly if you have enough - which is more than likely the case where the funds are an accumulation account post condition of release. This would be how I would look to handle things. I'd also make sure my EPOA understood all this and could act on my behalf - potentially quickly if required. If all goes well you wouldn't even need to consider enacting this type of plan until your 80s or even 90s - but it's always good to be prepared.