The (Swiss) broker doesn’t care.
Like you correctly state at the beginning (my emphasis in bold)
The (Swiss) broker/bank will convey condolences, pull out an info-sheet re the rules around inheritance of US situ assets, give this to you, ask for the Erbbescheinigung and instructions of where to transfer the assets held by them, and wish you a long and properous life.
Unfortunately I don’t know what a foreign broker will do.
As a matter of fact, there are quite a few Americans living in Switzerland. Not all of them are rich software developers that read Mustachian Post and are comfortably making six figures a month. Nevertheless, many of them will have 2nd pillar pension fund benefits - and some will file their own taxes with the U.S. Which, yes, I wouldn’t be surprised if filing it ****s to have to do it.
I don’t know about pillar 3a. That may be tricky on its own - but is hardly a very exotic investment for a Swiss residents. Same for real estate, if that’s an owner-occupied property in Switzerland. There will be ample precedent.
But if you keep a simple portfolio of a few run-of-the-mill ETFs or stocks…
I just refuse to believe that you have to shell out 100k for an experienced specialised tax lawyer.
If you are in ZH you can deduct 0.3% of the value of your stocks from your taxes (Kosten für die Verwaltung des beweglichen Privatvermögens).
There is one caveat though, any deduction made under this section reduces DA-1 reductions, so it might not be worth buying US ETFs just for the divident tax advantage.
Assuming your marginal tax rate is 35%. Assume dividend is 3% p.a. (100CHF dividend in 3,333 CHF value)
So in total you save 65.00-55.25=9.75 CHF. Or 9.75/3,333=0.3%.
Are my calculations wrong?
If the IE ETF receives 100CHF of dividends it can release 100% to you.
There’s (usually) no withholding tax on distributions from Irish ETFs.
100k with 2k US dividends = 300.- can be claimed back. If you deduct those 0.3%, you deduct 300.- from your taxable income.
So what is the result? Won‘t you get anything back from DA-1 or 210.- back (assuming a 30% marginal tax rate)?
The deduction reduces your effective tax rate as calculated for DA-1 purposes. It’s roughly
overall tax rate = total income tax amount / taxable income
tax rate for wealth income = overall tax rate * taxable wealth income / gross wealth income
taxable wealth income = gross wealth income - wealth income deductions
Wealth income deductions include ‘Kosten für die Verwaltung des beweglichen Privatvermögens’ but also interest for loans (including mortgages).
The overall tax rate is actually based on a special table, at least in ZH, so the above is just an approximation. Importantly, the marginal tax rate is not relevant for this.
I.e. your tax rate for wealth income may be below 15% even if your overall tax rate is above 15%. Which means that you only get a partial tax credit for US WHT. This is only relevant if your overall tax rate is already close to 15% (or below) or you have relatively large deductions (such as a mortgage or margin loan) or a low average dividend.
For the typical passive investor with a 2% gross dividend, it means that your overall tax rate needs to be around 18% or higher instead of just 15% to get the full tax credit for US WHT.
The above is only an approximation to explain the effect of the deduction. The actual calculation is different (relevant when you have a mix of DA-1 and other assets). More details are in this thread: DA-1 refund denied
I agree. I’ve taken a look at 706-NA and the instructions and am confident I know the basics of how to fill it out and where to deduct the treaty-based credit. I may have to research some further details but it doesn’t seem extremely complicated. It’s a 2 page form + instructions (if all you have to report are US stocks/ETFs, it’s more complex if e.g. US real estate is involved). I would have to look more into the details of form 8833, which must be attached but that’s a 1 page form. I’m confident I could figure it out myself as well with a bit of research.
I might consult with a specialized tax lawyer to be on the safe side but if they are familiar with this, they should be able to do this in significantly less than a day, which should be very far off from 100k.
With a portfolio with a 2% dividend yield 0.3% of the value of the portfolio is withheld.
EDIT:
Corrected thanks to @jay
You will get back the lower value of the 0.3% and (dividends - deductions) * tax rate
So with said portfolio and a tax rate of 15% and a 0.3% deduction, you’d still get 85% of the withheld amount back.
With a rate of 17.65% or more you will get the full 0.3% back.
I asked a US tax lawyer how expensive it would be to handle estate forms with the IRS and they wrote around 3k chf.
Another advantage of US ETFs is, that they have usually lower fees and offer much better factor products (Avantis, Dimensional)
The wealth management deduction (0.3% of tax value of investments) is a deduction on the taxable income, not a deduction of the tax amount. I.e., it’s closer to (dividends - deductions) * taxrate, which means that you get the full 15% US WHT (0.3% of the market value in your 2% dividend example) back with tax rates of roughly 18% and higher, not only 30% and higher (depending on various factors).
Ok, I have sourced usefull information, I think.
tl;dr: You are not “US citizens, US permanent residents, and other clients who hold a 9 digit US Social Security Number, or US TaxID” then there is no reporting, and there is no freezing for the IRS in any case.
I asked IBKR:
And they answered:
The question is: Do my heirs still have to file if the IRS doesn’t know and it’s below the current exemption from the treaty?
Rephrased that for you. 
Filing or reporting obligations („having to file“, as you put it yourself) usually exist regardless of whether the other party „already knows“ or not. And I wouldn’t bet that the IRS, of all things, thinks otherwise.
Well, the information that everything gets locked was wrong, too. But I did find some information that points to having to fill their forms:
BNP Paribas writes on their website:
What if it is below 60k USD?
EDIT: The IRS indirectly says no:
A Swiss bank will not force you to file (by blocking the account until you prove filing), nor will IBKR (source: their answer to your question that you posted a few posts up).
So, no, tell your heirs to withdraw/transfer and move on.
In the unlikely event, that IRS later demands you file, then you can still file. There would only be a fine ($100 to $1000) for having exceeded the 9 month deadline to file. You don’t lose the advantages of the DTA, because you “forgot” to file.
Of course all banks will cover their asses by handing out information sheets that you have to file, if US assets over 60k. That’s so you can’t sue them for not informing you of this “risk”, and also they can show nice internal processes to IRS auditors. Like they make you sign papers saying you “understand” the risks of trading on the stock market.
Any source for this claim?
Is there any documented case of the heir of a non resident/non citizen being in trouble due to estate tax?
Some of the extra territoriality from the US are pretty unusual, would any country extradite or pursue action on behalf of the US for that kind of case? To worst case it really depends on on much tie the heirs have to the US (but even then I really doubt anything would ever happen, if the US is never informed in the first place).
I can imagine the IRS caring in case of e.g. “hard” ownership (e.g. significant owner of a US company, real estate, etc.), but someone having a few shares in an ETF?
Ja, I know, I am only some random person on the internet, I’m aware of that, and understand your wish for a source on that.
I can explain the source, but it’s (unfortunately) not going to be a link to a US website listing this dismeanour and the fine amount/range. So, I’m afraid it won’t be fully satisfactory.
The source is a Swiss lawyer (he was supposedly the specialised one for such topics of the medium-sized law firm) . I assisted/stood by a close friend who was going through such an inheritance (all-swiss/non-US people, low 7-figure inheritance, high 6-figure US stocks).
The fine was the only risk, the lawyer stated, for non-declaration at the “correct time”.
The DTA stands highest from a law point of view, and does not lose its effect by not filing.
I’d like to add, because some have mentioned “just fill out the form, doesn’t look too difficult” - I do remember, that he did also mention that smallish accounts at US banks (a few $ 1000 to $20000/30000), which will be blocked, are often simply “written off”, because the procedure to file is often complex & involves expensive lawyers (the form itself may be not too complicated, but for example attaching a valuation of Swiss RE conforming to US IRS requirements and standards quickly costs thousands!)
Thanks for your insight.
As I understand it, initial documentation of the gross estate outside the US only requires a certified copy of the foreign death tax return. However, the IRS may ask for more proof. I don’t know whether they simply accept the Swiss death tax return or would ask for more documentation, assuming the total gross estate (per tax return) is significantly below the USD 12 Mio.
From the IRS instructions:
To document the line 2 amount, attach a certified copy
of the foreign death tax return or, if none was filed, a
certified copy of the estate inventory and the schedule of
debts and charges that were filed with the foreign probate
court or as part of the estate’s administration proceedings.
Supplement these documents with attachments if they do
not set forth the entire gross estate outside the United
States. If more proof is needed, you will be notified.
Is there any updated information or recent experiences regarding the cost associated with processing estate forms with the IRS? A cost in the low four-digit range would be acceptable, but if it reaches 100k as someone mentioned, it becomes a significant factor to consider when choosing between US and UCITS ETF options.