Hello, and welcome. This is Abhinav, and I welcome you. In this video, I’m discussing about the estate tax provisions in US, basically, an overview of those provisions. What I’m planning to do is to do a 3 part series, one video on estate tax, second video on the gift tax provisions, and the 3rd video on strategies on how to, reduce or eliminate estate and gift tax, especially for those who are, planning to return back to India. So this is the first video in the series where we will basically understand the estate tax provisions.
Right? So let us start. Okay. First disclaimer, this is a very, very complicated subject. Right?
So I’m basically, what I’m trying to do is just to cover an overview of the provisions so that you get a kind of a broad understanding of the provisions. There are lot of ifs and buts. Right? So if you are looking at, kind of, advice on your situation, do please consult a qualified estate attorney. Right?
So that is the one thing. So as I said, separate videos on gift tax and how to, legally avoid or reduce estate and gift tax, I will be making. So, this is basically a provision video on the estate tax provisions. Now, let’s first understand when an estate tax is applicable. So the estate tax is applicable only when all of the below conditions are satisfied.
Right? All of the conditions should tell satisfy. First thing that you should die. Right? Only if you die please understand this.
Only if you die, then estate tax will apply. As long as you are alive, there is no estate tax. Right? So that’s the first condition. Now second condition is that you are either of the one.
Either you are a US citizen or a resident at the time of death, or you are not a US citizen or resident at the time of your death, but you have US CITUS property. CITUS basically means it’s a Latin word for located. Right? So one of the 2, either you are a US citizen or resident. Now you may have property anywhere in US, out of US, in India, wherever.
Right? That is one, possibility. Second is you are not a US citizen or resident. That means maybe you have returned back to India. You don’t hold you are not a US citizen or resident, but you have property back in US, like, you have 401 k or IRA or you have stocks in US or a property in US, then also you qualify.
3rd is condition is that the value of the estate process, the estate tax threshold that is applicable to the year of death. Right? Now there is a threshold. I’ll come to the threshold. There is a different threshold of 13,000,000 for US citizens and US resident and another threshold of very low threshold of 60,000, which is applicable for non citizen, non resident.
Right? And that threshold keeps on changing every year. Right? So it generally gets adjusted every year, gets increased. However, after the 2025, the tax cut in Jobs Act, it’s planned to be reduced to half, so that’s another matter.
But in the year of death, what is the threshold? Right? And has that threshold been crossed? So there are all these three that apply. Either you die, second, either you are a US citizen time of death, or you’re a non US citizen or resident and you have property in US.
If you don’t have property in US, that’s you are out of the purview of past due tax. 3rd is if you satisfy first two conditions, 3rd should be that the value of the estate should be crossing the threshold, then it the tax applies. Okay. Now concept of resident for the estate no. Please understand.
Estate tax within title 26, in the federal regulations, estate tax is a separate subset of the title 26. So one is income taxes, second is another subset is estate taxes. So the when you talk about resident, the meaning of resident as per for estate tax purposes is different from the meaning of resident as per the income US income tax law. Under the US income tax law, you have basically US citizen or a green card holder or a person who is passing the substantial presence test. But here, the res meaning of resident is different, and it is not very clear.
Now for estate tax purposes, a resident is someone who has a domicile in US at the time of the death. Right? At the time of the death, you have a domicile. Now what is domicile? The wording says the person acquires a domicile by living in a place for even a brief period of time as long as there is no intention of moving from that place.
So it’s all about the intention, like in if you recollect in FEMA law. Right? In the Indian FEMA law, we the stress is on the intention. Similarly, here in estate tax in US, the stress is on the intention that if you are living at a particular place in US, right, even for a brief period, right, as long as there is no intention of moving from that place, you qualify as a as a resident. Now there is no bright line test, so there is no kind of a very clear guideline that is given.
Right? It’s all about the basis of facts and circumstances and maybe case laws. Right? Because I understand US is also a common law country. Right?
So there may be case laws on this matter. So if it’s a complicated case, if yours is a complicated case, please consult an estate attorney to know about your situation and about your tax liability because you don’t want to end up kind of not paying the appropriate tax and then incurring penalties and fines in it all. Right? If you’re a US citizen, then it’s very clear. You are a US resident.
But, otherwise, what is the definition of resident? Basically, you should be domicile. Domicile means you should be there in US at the time of your death for a brief period of time as long as there is no intention of moving away from that place moving from that place. Right? Okay.
Now estate tax, different provisions apply to different, basically, categories. So there are 2 categories. 1 is a US citizen or resident, so that has separate provision. For a nonresident noncitizen, nonresident, there is a separate so I’ll be discussing. Also, this may be a long slightly long video.
Now if US has a estate tax treaty with a country, then those provisions may override. Now US has, like, I think, around 15, 16 countries, US has treaties, which includes UK, Canada, and all. So those treaties provide certain reliefs, which then override the provisions of the individual estate laws of the respective countries. The unfortunate part is that US doesn’t have a estate or a gift tax treaty with India. Right?
So there is no such treaty benefit that you can get. Now tax rate. What is the tax rate? Tax rate is it’s a tiered structure. It starts from 18%.
So whatever the value of the assets which are above their threshold, right, the it starts from 18% and goes up to 40%, so it’s significant tax liability. So we are looking at a significant tax liability if your assets cross that threshold, right, which can actually wipe out the entire return on the assets that you have generated. Right? Okay. Now let us come at the estate tax provisions for US citizens and residents.
Right? Okay. Now estate tax for a US citizen or resident applies for a person who is dying in 2024 if on the date of death his or her gross estate is more than 13,000,000 13,600,000. Right? Or in case the person make wants to make certain portability elections, even though the estate value is less than that, but he wants to make certain portability elections, which I’ll come to.
Right? But, basically, the thing is you have to file an estate tax return only and only if the value of the estate crosses 13,610,000, right, which is a very, very big amount. Right? So, generally, this is a very less case for the estate tax liability to arise. Now, basically, here, the executor, basically, executor has to paper file form 706 to IRS within 9 months from the date of death.
So the form that needs to be filled is form 706. It has to be filled by the executor of the estate, and it is a paper form. It is not a electronic form, and it has to be filed within 9 months from the date of death. Now after filing the estate, the estate tax return, it is a it’s a very complicated return. It’s like a 30 page return, very complicated.
So you’ll need professional help for filing this return. Basically, a estate attorney will be filing the return for you. Now there is a separate application to be made for estate tax. So once you file the return, a separate application has to be made for the estate tax closing letter to be obtained from the IRS. IRS says, or as per its publications, that they will issue it within 9 months.
I’m not sure whether they issue it within 9 months or if they take more time, but the thing is that if the assets are subject to estate tax, the brokerage or wherever the assets are there, they do not issue the proceeds of the assets unless they are provided with the estate tax closing letter, and that IRS says that they will take 9 months. So it’s a it’s a long process of, like, 2, 2 and a half years after the death for this entire process to complete and for the beneficiaries to for your beneficiaries to receive your investments, your assets. Now what is gross estate? For the gross estate calculation, it includes basically all property where the person has an interest, including property outside in the United States. So you have property in US.
You have property in India. You have property in, maybe, UAE. Everything across the world is included. Right? Like, in income tax for a US citizen or US resident, world income is included.
Here also, world income less not world income. Sorry. World assets less any debts owned by the asset on the assets. So, for example, there is a house and then there there’s a loan, so that loan is reduced. Now the value of the asset, there are specific valuation rules that are given, but, basically, it’s the fair market value as on the date of death, and then there is an alternative election you can make for, like, for up to 6 months.
That is a separate thing, but, generally, it’s the fair market value, not the cost. So we are talking about the value of the asset as on the date of death. Now any asset now if you have a US citizen spouse say your husband dies, the spouse is also US citizen, there’s an unlimited marital deduction. Right? So whatever assets, even if it is more than 13.61, the assets, they get transferred to the spouse, then there is a unlimited marital deduction.
That means you can transfer 100% of the assets without any estate tax on death to your spouse, but the condition is the spouse has to be a US citizen only. Right? Only US and not even a green card. US citizen. If that is the case, then you are saved.
No problem. Right? Because the assets go to the spouse. Okay. Now in the calculation, when you calculate the estate tax, the exemption threshold, which is basically the 13,610,000, that stands reduced by any taxable gifts that you’ve made in the lifetime in your lifetime.
Right? You can check my separate video on gift tax, where I’ll talk about what is taxable, what is not taxable. So anything above a certain threshold, which is, like, 20 for 20 24, it is 18,000 USD. Right? Anything above 18,000, which is a taxable gift, which you reported in form 709, that to the extent it is more than that limit, the exemption limit of 13,600,000 stands reduced for the estate tax calculation purpose.
Right? So it is that’s why it’s always suggested that you should keep your gifts below that limit every year so that the estate tax limit stands intact. I know it is a bit complicated, so, I’m just giving you certain thought pointers for you to do your own research. Right. Okay.
But it’s a complicated subject. Right? Okay. Now credit claimable equivalent at 2023 rates on form 706 for calculation purposes, 5,000,000 51138100. Now this is basically don’t get confused.
This is no such some credit that you can get from the estate tax. No. No. So the how the provision works is that your assets are more than 13,600,000. Maybe it’s, let’s say, 20,000,000.
Right? So you first calculate the tax on the entire thing, right, the estate tax, and then you get the credit. Right? You get the credit, which is equivalent to 2023 rates of this. Right?
So that’s this is just for information. There’s no actual asset of credit. It’s just the procedure how it is calculated. Right? Okay.
Now there are some portability elections you can make and which is a very, very useful election. Deceased spouse unused exclusion, DSUE. That basically is that if your estate is less than the threshold, less than 13,610,000, there’s no estate tax liability. You only need to file the tax return estate tax return. However, you can still file that estate tax return and make a portability election of this amount, d s u e amount, which basically helps to transfer the unused amount unused amount, which is amount of your s the total exception threshold is the amount of your estate that can be transferred to your spouse tax free.
Right? But it is only available if the 706 is filed timely, and this election, unfortunately, it is not available for a nonresident, noncitizen. It’s only for a US citizen. Right? So that is a US citizen or a resident.
So that election can be done. It’s a highly advisable election that can be done. Then there can be if your spouse is a non citizen spouse see, in case of citizen spouse, USC spouse, there is an unlimited marital deduction, so there is no problem there. But if your spouse is a non citizen, there is no unlimited exclusion. There’s no unlimited marital deduction.
However, you can make a QDOT election. QDOT is a qualified domestic trust. Right? It’s again, I’ll make a separate detailed video on that. You can actually put your assets in a trust, qdot trust, where the wife, non citizen spouse is a beneficiary.
And if you do that and if you file 706 where you make a q dot election, your spouse will get an unlimited marital deduction like a USC spouse. Right? Though your spouse is non citizen, she will get unlimited marital deduction, and, basically, what it does is that it doesn’t waive the estate tax liability. It defers the estate tax liability till the death of your spouse. So after she dies, the estate tax will be applied on the on the, gross estate.
Estate tax will not get applied on your death. Right? So, basically, it gets deferred. This is a very good way where if your spouse is a noncitizen I I’ll cover it in the 3rd video where we talk about q dot, and I’ll make a separate q video on q dot, which is a very useful mechanism. Right?
If you have properties in US and which are exposed to a state tax, you can use this kind of a bill. Okay. Then you can, get a deduction if you make a transfer to qualifying charities. So if you have a will where you have written that after my death, my money should go to these charities, which are qualifying charities, you’ll get a deduction for that. Then credit available.
So you get the credit for state. So there are certain so what we are talking about is the estate tax provisions under the US federal law. The state itself may have certain inheritance or estate provisions, which may have different thresholds. So if you have paid any estate tax in the state, now you can actually claim that on an estimated basis also, or there is an estate tax which is there in the foreign country where you are maybe living right now. So, thankfully, in India, we don’t have a estate tax.
We don’t have a inheritance tax. But if you are living in a country which has imposed any estate tax, and maybe there is no treaty benefit that you can get, so you can claim all those deductions. You can claim funeral expenses, attorney fees, etcetera. Credit for that, you can claim. Then so then there are simplified valuation rules where you are filing an estate tax return only to get the portability election.
There is no filing requirement that exists, but only for the portability election, the DSTV election, or a q dot election you are filing the return, then there are simplified valuation rules that apply. Then there is a requirement to provide supplemental documents to be attached to the estate tax return, which includes your death certificate, copy of the certified copy of the will. If you don’t provide certified copy, then an explanation is required why you are not providing certified copy. Probate. Right.
If there’s a foreign probate, foreign country, then foreign country, probate, then foreign death return. If there is a death return, any state tax return you’ve filed in a foreign country, that also needs to be attached. So the whole lot of requirements are there attached to the estate tax, so it’s a it’s a process in itself. Okay. So this was for what we discussed was for US residents or US citizens.
Now let us come to, the estate tax provisions for non citizens, non residents. Right? Now for a person dying in 2024, a non citizen, nonresident, right, like a person who doesn’t have a USC, who is not a resident, who has maybe moved to India, and who has SS lying in US, the estate tax is apply applicable on the if the value of the estate is more than $60,000. This very few people know, and the awareness has to rise on this particular matter that there is a very low threshold. That’s why if you’re returning back to India with your assets in US, you need to check on this estate tax aspect.
Right? The your a big chunk of your entire, savings, right, can get wiped out in this estate tax if you’re not mindful and if you don’t plan around the estate tax. Right? So it’s a very, very low threshold. Okay.
Now executor needs to paper file form 706na. So for US citizens, it is 706. For non US citizens’ residence, it is 706 NA. Rest is the same. It’s paper filed to the IRS within 9 months from the date of death.
That all is same. Again, separate application for to IRS for the closing letter. Now very, very important thing. Please understand. For the US citizen resident, it’s the world property.
However, the good thing for nonresident, noncitizens is it’s only the US site use property. That means your interest in a property, which is there in the US. Now property means not only real property, real estate. It’s any property, stocks, bonds, 401 k, IRA, whatever you have, Roth IRA, everything, but only in the United States, right, not your Indian property or any other country. Right?
So now the question is, what qualifies what qualifies as US site use property? Right? Because the estate tax, the limit applies only to the US property. So there are some general rules that are given. I’m taking that.
Now if you have real estate in US, like a home in US or any tangible personal property in US, except there is an exception for work of art. Right? But other than that, any real actual property you have, right, it is considered located in the United States if it is physically located there. Right? So that is very clear.
Now stocks. If you have stocks now if the stocks are of corporations organized or an in or under the US law, is property. So you may hold those assets in a maybe 401 k, in a IRA, in a, you know, in a brokerage account, wherever. But if the stocks are of corporations which are organized under US law, which are companies are registered under the US law, They are considered USITUS property. All other corporate stock is located outside the United States.
Right? So, for example, you are holding your brokerage account stocks of companies of, say, 3rd country, maybe Canadian companies, right, which are not organized in the United States that are outside the purview of US securities property, even though the brokerage is a US brokerage account. Now proceeds of insurance policies on the decedent’s life. Decedent is basically the person who dies. Now this is very important.
If you have insurance policy, any insurance policy, the proceeds of the insurance policy are property located outside the United States. So if you have US insurance policy, it may be permanent insurance, variable insurance, term insurance, whichever insurance in US, that is considered property located outside the this is a good benefit for noncitizens. Right? We’ll come to in the video 3 in the 3rd part, we will discuss about the insurance bid. So this is a good benefit.
For noncitizens, insurance policies are considered property located outside. But for citizens, it is considered property within the US. So that please understand the difference. Now debt obligations are properly located if the debts are of a US citizen. That means you have given a loan to someone who is a US citizen, US resident, domestic partnership corporation.
There are all are the property which is located in the US. Then some deposits are treated as locations located outside the United States if they do not pertain to your business. If they are not connected to a business in the United States, like you have a deposit with the US Bank, right, you US Bank or a US Banking Branch of a for foreign corporation, if you have a deposit of withdrawable account with a savings or loan associated under US law or amount held by US insurance company under an agreement. So, basically, bank deposits, bank accounts, they are all considered property outside the US. Right?
So even if you have a, like, a US Indian branch of a US bank, you have a deposit that is also considered property outside the US. Right? So that is the Okay. Then there are special rules for USCGC who are who have expatriated from the US prior to their death. So there are special rules, complicated rules for those who have expatriated.
There are special rules for them. Now in the calculation, exemption threshold is reduced similar to US citizens. If you have made any lifetime gifts, which are taxable and which you have reported in 709, they will get reduced from the exemption threshold of 60,000. So, anyways, the threshold is very low. Still, if you have made any taxable gifts, that is even reduced from there.
Credit claimable 2023, let’s say, 13,000. This is just for information purposes. It’s basically for the calculation purposes in the return. Now you can take now if you are a noncitizen and you are married to a US citizen spouse, you are in luck. Right?
Because you get unlimited marital deduction for the USC spouse. Right? So if your spouse has got a USC, great. Right? No problem.
You can get unlimited. Even if your assets are above 60,000, it can be any amount. Your wife will get it without any estate tax reduction. But the unfortunate part, if your spouse is not a US citizen, there is no deduction unless a q. Election is made, which basically helps defer the estate tax liability till the death of your spouse.
Now the good thing about q. Election is that you can do it in your lifetime, or even after your death, your spouse gets this opportunity to make a QDOT election. Right? She’ll have to talk to a US, estate attorney. They will they can make the assets under q.
Then the asset can be the QDOT election can be checked, and she can get the assets without estate tax. Basically, it’s a deferral. It’s a tax deferral. The liability is not waived, but at least she will get it, as a unlimited marital deduction at her end. So this is a point that you can keep in mind.
Now deduction available for transfer to qualifying charities if you have made such, select, kind of in your will or something. Now credit available for funeral expenses, attorney fees, claims against estate, unpaid mortgages. You can, you know, get a credit for those things. Again, you need to attach supplementary documents, which is debt certificates, copy of fill, probate, copy of balance sheet, if you have ownership in closely held corporations, all that. Right?
Okay. So this is it. This is the only the estate tax. The gift tax, I will cover in a separate video, and I hope this video was useful. And, if you have any questions, see, I I will not have all the answers because it’s a very complicated topic, but still whatever I can help, I will help you.
Do please share your questions. I hope this video is useful, give you a kind of a insight into what is the regulations around the estate tax. Thank you so much for watching this video. Next video, I’ll cover the gift tax aspects. Thank you so much.