It’s a known problem in Switzerland, too. The surviving spouse cannot access funds since the bank blocks the whole account - until the heritage-certificate (Erbenschein) is issued by the court.
The limit is pretty high. -> https://en.wikipedia.org/wiki/Estate_tax_in_the_United_States
Let’s assume you have a joint account, you could withdraw the money with your own account.
How IB would not that one of the two owner is dead?
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Not the case with joint accounts, at least with UBS.
Good question. They could ask for joint verification maybe, esp. if it’s a big sum?
I asked a legal firm specialized in US Tax for foreign residents about the cost for filling all forms required for handling estate taxes and they quoted 2000-2500 CHF + VAT.
The cost advantage of US funds over IE funds will bring in more in a relatively short time.
So probably half a day of work for a skilled worker and maybe a full day for a mustachian who has this tutorial: Estate tax treaty US-Switzerland the final answer about the VT ETF (with the MP family as concrete example)
I was looking for information to stay clear of hassles with the estate tax in the USA. But I’m still missing some pieces. Also I don’t have absolute confidence in what I gathered. Please correct me if and where I’m wrong.
Nonresidents not citizens of the US are liable for estate tax of up to 40% in the USA on US situs assets upon dying. This is between you and the USA, so the domicile of your broker is irrelevant. There is a general exemption of 60’000 USD. Swiss nationals or residents benefit from the relevant treaty and are subject to the same exemptions as resident US citizens. It was upped to about 11M USD in global assets during Trump and I didn’t see any update or change to this yet. If you have more global assets, your US situs assets will be taxed proportionally. This will be to the same rate that your global assets exceed the exemption.
Even if you do not exceed the exemption given by the treaty, your heirs will still have to file all your assets with the IRS. I hold it likely that one would need an expensive specialized lawyer. I heard numbers of up to 100k USD thrown around. You need this lawyer to minimize/transfer the risk of making mistakes with awful consequences. There might be all kinds of incompatibilities between the systems. So non-existing forms might be required from institutions that don’t want to deal with your problems (e.g. 2nd pillar and 3a providers). The assets will be locked by the broker till the IRS gives permission (especially if you use a broker in the USA).
Examples of US situs assets are:
- ETFs domiciled in the USA
- Stocks of US companies
- Cash at a broker in the USA
Examples of non-US situs assets are:
- ETFs not domiciled in the USA
- Stocks of non-US companies
- Cash at a bank in the USA
- Cash not in the USA
How problematic any of this is correlates with your risk of dying. Some rough calculations for US vs. IE ETFs on US Stocks, 3% dividends, and 15% Tax in Switzerland give me an advantage of about 0.38% per year in favor of a US ETF. Adding cheaper TER gives about 0.4%. (This is with inputs that maximize that number). If you can’t die that is. If you can die that changes:
For example if you hold 1M there and the lawyer eats 100k then you break even at 4% of yearly chance of dying. It is sometimes suggested to compensate with life insurance. So I ripped some quotes for life insurance from Nerdwallet for a rough guesstimate. Average health reaches that risk around 60 years old. YMMV
And if you need to pay estate tax a 1% yearly death chance will be enough without the lawyer.
My questions:
- How does it play out if your US situs assets are below 60k USD? Would the broker just check if your US situs assets they hold are below threshold and then release them to the authorized executor?
- What assets should be held to stay below 60k USD? Probably Irish ETFs.
- What about the cash float? For Switzerland IBUK is the entity you open your IBKR account with. Is your money still parked in the USA with IB LLC and thus US situs?
- IB LLC offers an “Insured Bank Deposit Sweep Program” for PRO accounts where they put your cash up to 2.5M USD into different banks. I wonder if these assets become non-US situs. And also if you can use that from IBUK.
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.
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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)
- IE ETF receives 100CHF of dividends and releases 85CHF to you, after tax you receive 85*65% = 55.25 CHF
- US ETF receives 100CHF of dividend and releases 100CHF to you, after taxes you receive 100*65%=65 CHF
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)?
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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.
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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)
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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).
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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?
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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.
