US Federal Estate Tax: The Hidden Tax Exposure for Irish Investors
Many Irish investors assume that US Federal Estate Tax only applies to US citizens or individuals living in the United States. However, this is not always the case. Irish residents who hold certain US assets, including shares in US-incorporated companies, may create an unexpected tax exposure for their estate.
Example
Consider the example of John, who lives in Cork and has worked for a US multinational for over 20 years. During that time, he has accumulated shares in his employer worth €100,000. He also holds a further €50,000 in US company stocks through an investment portfolio. Under the terms of his Will, John’s assets will pass to his wife on his death.
Although John is Irish resident and domiciled, his estate may still have a US tax exposure. Under the Ireland/US tax treaty, assets such as real property and shares are taxable in the country where the asset is located or where the company is incorporated. Assets such as bank accounts are taxable in the jurisdiction in which the deceased was domiciled at the date of death. This means shares in US companies are treated as US-situated assets, giving the United States primary taxing rights for US Federal Estate Tax (FET) purposes.
The current top rate of FET is 40%. While US citizens benefit from a much higher exemption threshold of $16,000,000, the exemption available to non-resident, non-US citizens is only $60,000. As a result, even a relatively modest holding of US shares can give rise to a filing requirement and potential tax liability.
The Ireland/US tax treaty applies to inheritance tax, but not gift tax, and Irish Revenue will allow a credit for the US tax paid. However, there can be a mismatch between the jurisdictions on how inheritances are treated. In Ireland, transfers between spouses are exempt, however in the US, such transfers between non-US citizen spouses are subject to FET. This means that if John leaves his estate to his wife, there is still a liability to US FET.
There can also be practical complications for executors. In many cases, registrars or brokers may not release US shares to an estate until the relevant US tax filings have been completed and formal clearance has been obtained from the IRS.
Conclusion
If you hold shares or investments in US companies, it is important to consider whether your estate could be exposed to US Federal Estate Tax. Advance planning can help identify potential liabilities, reduce delays for your executors and ensure your estate plan operates as intended.
Reach out to us if you hold US investments and would like advice on the potential tax implications for your estate.
