Transfer Tax Issues: Inheritance and Gift Tax

Non-resident shareholders have a potential problem. If they die while directly owning the shares of a U.S. corporation, the value of those shares is subject to estate tax in the U.S. There is a meager $60,000 exemption, then the tax of roughly 35% on the first $1mil, and 40% after that.

Therefore, owning the stock via a foreign corporation or a non-revocable foreign trust is advised.

Example 1:

A foreign founder dies while holding a 20% stake in a U.S. corporation. The entity’s value is $15.3mil; thus, the value of 20% is

$3.06mil, ignoring any discounts. The inheritance tax is calculated as follows: $3.06mil less $60,000 is $3mil of the taxable amount. The tax is $350,000 (35% on the first $1mil – approximate), plus $800,000 (40% on the excess) for $1,150,000. The heirs would have to sell part of the stock if there are no restrictions by the company or borrow against these shares in order to pay tax, which is due 9 months after the date of death.

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