As many Irish investors typically have large exposures to US shares in their investment or pension accounts, we are frequently asked: what is the potential exposure to US Federal Estate Tax (FET) on US investments in these accounts on death? And while the overriding message is always that tax should not dictate the investment objective, here we have sought to address the most frequently asked questions raised by Irish investors in relation to the potential exposure to US FET on US shares.
Before we get started, it is worth mentioning that it is not just the US that seeks to tax US shares in the manner described below, other countries may have similar rules in relation to shares located in such countries but given the number of queries we receive from investors with assets exposed to US FET, this Q&A will focus on the US rules. Any reference to non-US citizens means those also not domiciled in the US.
What is the main difference between how US Federal Estate Tax and Irish Capital Acquisitions Tax operate?
One of the main differences between US FET and Irish Capital Acquisitions Tax (CAT) is that US FET is charged on a deceased person’s estate once the relevant tax exemption amount is exceeded. Whereas Irish CAT does not arise on the value of a deceased person’s estate, it instead arises on the taxable value of the inheritance received by a beneficiary once the beneficiary’s relevant lifetime tax-free threshold has been fully utilised.
The US charges FET on all the assets in a deceased person’s estate if that person was a US citizen, or US domiciliary on the date of death, once the value of the estate exceeds a threshold amount, which in 2024 is $13.61m. However, in the case of non-US citizens and non-US domiciliaries, which would be many Irish estates, the US charges FET on US situs assets (that is, US located assets) only, once the value of the US assets in the estate exceeds $60,000. Thereafter, rates of up to 40% apply.
As we have mentioned, Ireland charges CAT on the taxable value of an inheritance that a person receives, once their relevant lifetime tax-free threshold has been fully utilised. In the case of an inheritance that a child receives from their parent, the lifetime tax-free threshold is currently €335,000.
How does US FET typically arise in an Irish person’s estate?
US FET typically arises in Irish estates where the level of US assets in the estate is in excess of $60,000. The most common US situs assets within scope of US FET include US real estate, shares in US corporations, interests in US mutual funds and US registered ETFs or other US domiciled funds, and so on.
Given that many Irish investors own US assets with a value greater than $60,000, US FET is likely to become an issue for their executors to consider.
Who is responsible for settling the US FET exposure?
Where a US FET liability arises, it is the executors’ liability to settle any amount due. If they do not, the US tax authorities (IRS) could look to the executors personally, the beneficiaries of the estate or even the custodian of the US assets to settle the tax due.
The normal due date for filing and paying the tax is nine months following the date of death. Late filing and payment can incur interest and penalties.
Is there an exemption from US FET for inheritances between spouses?
While an exemption from US FET may apply in the case of an inheritance left to a US Citizen spouse, an exemption is not available if US assets are left to a non-US Citizen spouse. As a result, where US assets pass from an Irish person to their Irish spouse, US FET would typically arise on the value of US assets in the estate above the $60,000 threshold, at rates of up to 40%.
Is there relief from double taxation where US assets are subject to US FET and Irish CAT?
Where a deceased person’s estate is subject to US FET in respect of US assets and an inheritance of the same assets from the deceased person’s estate is also subject to CAT in Ireland, relief from double taxation may be available under the Ireland-US Estate Tax Treaty.
While US FET may arise on an inheritance of US assets between spouses, from an Irish tax perspective, inheritances between spouses are exempt from CAT and as a result, double taxation relief would not be available.
Where a child inherits US assets from a parent and US FET arises, the child should be in a position to obtain credit against their CAT liability for the US FET incurred (assuming the child’s parent-to-child tax-free amount has previously been fully utilised).
I’m concerned about the level of Irish and US taxes that may be due on my death, is there any advance planning I should consider to minimise the impact for my estate and beneficiaries?
1. Leaving US assets directly to children
The default position for many Irish married couples and civil partners is to leave their estate in full to the surviving spouse/civil partner in the first instance and thereafter to leave the estate to their children. In such cases, there can be an exposure to US FET on the death of the first spouse (where the estate holds US assets in excess of $60,000) and there can be a subsequent exposure to US FET on the death of the second spouse (again, where the estate holds US assets in excess of $60,000).
As a worked example, where an Irish investor holds US assets with a value of $1m and on his passing leaves these US assets to his spouse, a US FET charge at rates of up to 40% will apply on the $1m. In this regard, a FET charge of $400,000 would apply less a credit in respect of the first $60k of US assets which works out as a credit of $13,000. The net US FET charge is therefore $387,000 and the surviving spouse would therefore inherit US assets of c. $613,000. Where the surviving spouse then leaves the net amount of US assets of c. $613,000 to the children, a US FET charge of $197,610 would arise in the estate, the children would therefore receive US situs assets of c. $415,390.
Where the intention is for the US assets to ultimately be left to the children, parents could consider leaving their US assets directly to their children on their passing, rather than leaving the US assets to the surviving spouse. Using the example above, where a parent leaves US assets of $1m to their child, a US FET charge of c. $387,000 would arise and the children would then be left with a net amount of c. $613,000. Additionally, the children should be in a position to obtain credit against their CAT liability for the US FET arising (assuming the children have previously fully utilised their CAT tax-free threshold).
Currently, investors could also consider lifetime gifting to take advantage of lower asset values to utilise a child’s tax-free threshold. However, other taxes would need to be considered in this situation, such as CGT.
2. Non-US situs investment products
As it is the situs (location) of an asset that determines whether an asset is within the scope of US FET, investors often prefer to invest in non-US investment products, such as Canadian or EU-domiciled investments products, even ones which invest in shares or bonds of US corporations. While such investment products may not give rise to a US FET exposure, the tax implications in the country of domicile of the investment product would need to be considered. For example, some countries may impose CGT or other transaction charges on the transfer of an investment located in that country on death.
In addition, where investors consider, for example, investing in funds located in an EU country that are subject to Irish funds tax (currently charged at 41%), death gives rise to a funds tax charge. This tax charge on death is allowed as a credit against CAT payable by the beneficiary (subject to conditions and assuming the beneficiary would incur CAT on the inheritance).
3. Non-US Corporations & Non-US Partnerships
Where investors hold US assets, such as shares in a US corporation, in a non-US corporation as classified under US domestic law, it is likely that in this situation it would be the shares in the non-US corporation that are passing on death rather than the underlying investments held in the US corporation. Shares in a non-US corporation are outside of scope of US FET.
In limited situations, an investor may also consider holding US intangible assets in a non-US partnership. However, this type of holding structure doesn’t come without risk. Given recent legislative changes in the US as well as the fact the IRS will not rule on the treatment of a partnership interest for Estate tax purposes, there is less certainty on whether a non-US partnership interest will be deemed situate outside the US and therefore outside scope of US FET purposes.
Legal and tax advice should always be taken to ensure the intended Estate planning objectives are being addressed and can be achieved.
Does holding US shares or other US investments through an Irish nominee remove the exposure to US FET?
A nominee arrangement may be in place for holding such shares. This should not be viewed as a basis on which US FET would not be due as the asset's ultimate beneficial owner remains the individual. In other words, the nominee arrangement is generally disregarded for US FET purposes.
What are the US FET implications where a person holds US assets in their Approved Retirement Fund (ARF) or Vested Personal Retirement Savings Account (PRSA)?
The treatment of an ARF or PRSA under US FET rules will be dependent on a number of factors, including but not limited to how each retirement product is structured and how this is classified under US rules.
In cases where the holding structure is disregarded under US classification rules, the underlying assets of the retirement product may be within scope of US FET if they are US situs and where the value exceeds $60,000.
What are the US FET implications where a person holds US assets in other pension structures?
Where a person holds US assets in Irish pre-retirement pension vehicles (e.g., an occupational scheme), given their structure and the nature of how benefits are paid on death, no US FET exposure should generally arise on the death of the pension holder.
How can Goodbody help?
If you are in doubt about the amount of taxes an estate or beneficiary will face in the event of death, get advice. After all, because of the interaction of the investment objective and the tax rules across multiple jurisdictions, it is an area that requires careful consideration.
By undertaking a review and identifying any planning that can be done, it will not only ease your worries by giving you peace of mind, but it will also make it easier for those left behind.
If you would like to have a discussion with a member of our team, please contact your Goodbody representative today.
This article was originally published on 9 November 2022. It was updated and republished on 27 May 2024.
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