For nonresident alien decedents dying after November 10, 1988 (the date of enactment of the Technical and Miscellaneous Revenue Act of 1988 (“TAMRA”) the estate tax rates are the same as for U.S. citizens.
Credits available to offset the tax include:
(a) IRC § 2102(b): Unified credit of $13,000 is equal to an exemption for $60,000 of property. The unified credit amount is increased under some treaties.
(versus $1 million for U.S. Citizens and residents)
(b) A credit for state death taxes paid.
(c) A credit for federal estate tax paid on prior transfers of property included in the gross estate.
(d) No credit for foreign death taxes paid.
Deductions available to offset the estate tax include:
(a) Marital deduction.
(1) Since the enactment of TAMRA, the marital deduction is available to non-resident alien decedents for gifts to (or in a QTIP trust for) a spouse who is a U.S. citizen.
(2) The opposite is also true – gifts to or for the benefit of a spouse who is not a U.S. citizen (even if they are a U.S. resident) no longer qualify for the marital deduction. IRC § 2056(d). The estate tax can be postponed, but only if property is placed in a trust which qualifies as a Qualified Domestic Trust.
(3) Qualified Domestic Trust (IRC § 2056A) must provide:
(i) One of the trustees must be a U.S. citizen or a domestic corporation who has a right to withhold estate tax on financial distributions;
(ii) The surviving spouse must be entitled to all the income from the trust, payable annually or more frequently;
(iii) The executor must make an election; and
(iv) The trust must comply with regulations applying to qualified domestic trusts to be issued in the future.
(4) The estate tax is only postponed until there is a distribution of principal, either upon termination of trust, or earlier (except for lifetime distributions on account of “hardship”). The estate tax is imposed at highest rates applicable to the estate of the first spouse to die.
(5) A credit for prior transfers will be available to the estate of the second spouse to die if the property is also taxable in his/her estate. IRC § 2056(d)(3).
(b) The charitable deduction is available for gifts to certain qualified charities (IRC § 2106 (a)(2)(A)).
(c) The estates of nonresident aliens are entitled to deduct a portion of debts and expenses of administration. See IRC § 2106(a)(i); Treas. Regs. §§ 20.2106-1 and -2. The deductible portion of such items is determined by a fraction; the numerator of which is the value of the gross estate situated in the United States, and the denominator of which is the value of all property included in the gross estate. Treas. Reg. § 20.2106-2(a)(2). The deductible amounts may have been incurred or expended within or without the United States. As a condition to allowance of any such deductions, the estate tax return must disclose the decedent’s gross estate situated outside the United States. Treas. Reg. § 20.2106-2(a)(2).
Only a proportional part of a recourse note secured by a mortgage on U.S. Property is deductible, while the mortgaged property is includable in full. Thus in some circumstances, the tax could exceed the decedent’s equity interest in the property. However, where property is subject to a non-recourse mortgage, only the value of the equity of redemption is included, thus in effect giving a 100% deduction on the mortgage.