The $60'000 cap for US investments

Here I want to clarify this mystery around a particular regulation on the US estate Tax (Erbschaftssteuer) and Gift Tax (Schenkungssteuer).

As MP pointed out in his post about the mustachian 3-fund portfolio, Swiss investors should stay clear of the 60’000 Dollar mark for US domiciled Funds. MP cites a Credit Suisse brochure (for once english!). The basic conclusion is that as long as you don’t qualify as a US person (after the varying definitions of the US Tax authorities) you are considered a Non Resident Alien (NRA) that can make use of a $60’000 Estate Tax Exemption.

To my best current knowledge this means that if you stay below this $60k with your US domiciled assets AND don’t qualify as US person, you won’t have to deal with this. if you breach it or if you become a US person for Estate Tax purpose, you may pay some taxes when passing these assets to you heirs after death.

Does anybody know if there are further complications of this sort?

The IRS (The Internal Revenue Service is the USA’s tax collection agency and administers the Internal Revenue Code enacted by Congress) states here the situation more precisely.

According to this Article, foreign stocks (from the US View) and a few other assets are comletele exempt from estate tax for NRAs. There is even a tax treaty between Switzerland and US, but the numbers of their example dont give me the impression of a significantly changed situation.

What is your knowledge about this?

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U.S. estate tax is of little concern for swiss residents.

Swiss-US estate tax treaty mandates that U.S. applies the same estate tax exemption for swiss residents as for U.S. residents, i.e. about $5M currently, not $60k.

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That is extremely interesting! Thank you!

Can this be confirmed from somebody else?^^

Have a look to this: https://www.amcham.ch/publications/downloads/2011/flaws_in_the_current_US_Swiss_estate_tax_treaty_and_the_need_for_a_modern_treaty.pdf

I don’t know if there would be a difference on the application of the estate tax between:
a Swiss having U.S based ETF with a Swiss broker
a Swiss having U.S based ETF with a U.S broker

Have a look to this: https://www.amcham.ch/publications/downloads/2011/flaws_in_the_current_US_Swiss_estate_tax_treaty_and_the_need_for_a_modern_treaty.pdf2

That article talks mostly about all the bad stuff that happens once you cross US’s $5M exemption limit. Unless your net worth approaches that amount, there’s nothing really interesting for you to see in there and US estate tax is still of least concern to you.

I don’t know if there would be a difference on the application of the estate tax between:
a Swiss having U.S based ETF with a Swiss broker
a Swiss having U.S based ETF with a U.S broker

Broker’s location is irrelevant from the perspective of US estate tax, it’s the location of assets that matters - fund domicile in case of ETF. So, once you approach the $5M worth, you should probably switch from US to LU/IE ETFs to avoid US estate tax, however you’ll take a hit in dividend taxation in doing so. If you stay with US ETFs, the only advantage of a non-US broker for holding them may be that they hopefully won’t rat you out to the IRS outright, although I wouldn’t be so sure on that. US really got most countries by the balls with FATCA and stuff.

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This is very interesting, thank you @hedgehog! I picked IE-domiciled funds because of this, but if that’s not an issue, is there any reason not to go for cheaper US ETFs?

For the US stocks, either holding them directly or via a US-domiciled ETF, all other things equal, is usually a better choice from taxation perspective. And they’re also much cheaper to trade.

When US companies or funds distribute dividends to abroad, US withholds 15-30%. When they distribute directly to you in Switzerland, the rate is 15% (thanks to US-CH treaty), and it’s fully reclaimable with DA-1. However, when there’s an intermediary such as a non-US ETF on the way, those 15-30% are withheld from the fund, not you, and not reclaimable in Switzerland. The fund then distributes leftover 70-85% or so to you, and may or may not withhold something from it again, depending on its own country regulations - you can reclaim just this withholding tax, but not the original US tax.

Allow me to show a simple example that pretty much speaks for itself:
https://www.bloomberg.com/quote/VOO:US - 2.37% dividend yield
https://www.bloomberg.com/quote/VUSD:LN - 1.62% dividend yield

About 30% difference - that’s the US withholding tax in play.

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@hedgehog Vanguard told me that only a 15% withholding tax is applied on their Ireland based ETFs

On this factsheet, the gross of expenses is superior to the benchmark
https://global.vanguard.com/portal/site/loadPDF?country=be&docId=2108

The benchmark is the S&P 500 Net Total Return Index represents price-plus-net cash dividend return. Net cash dividend equals reinvested dividends less 30% withholding tax

However, Bloomberg indicated a withholding tax around 30%. Really weird

Prospects, sales pitches are just promises. Data is the hard cold truth - I think those 30% are no coincidence. (Unless, of course, bloomberg has the wrong data, then maybe you can double check with other sources.)

And even if it were 15%, it would still be better to own US directly to be able to reclaim the tax.

The benchmark is the S&P 500 Net Total Return Index represents price-plus-net cash dividend return. Net cash dividend equals reinvested dividends less 30% withholding tax

Well, there you go. They don’t even promise you a performance better than S&P TR with 30% dividend loss. Small differences in performance might be explained by different closing times of US and EU exchanges, diff seems to be within the range of normal daily volatily.

That’s all really interesting…I decided to go with Ireland based fund. I thought it was more difficult to get back your source tax.
Anyway the danger I see is that US tax policy is highly volatile. With bush the erbschaftsteuer was practically eliminated, with Obama came back big time, now trump wants to eliminate it, and maybe the next democrat will change again. I almost prefer to be taxed by the us 15% on dividends but then all their claim disappear.

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You can always sell US and buy equivalent IE fund every business day, incurring only small trading expenses

IMHO, it’s very worth it. 15% dividend loss at current dividend yields is equivalent to a 0.30% raise in TER. And 30% for some european funds is equivalent to 0.60%, making them actually pretty damn expensive to own

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I am not yet decided on this topic but i want to let you know i am following closely this discussion :wink:

That’s not really true though. It depends on which ETF; I have a one etf strategy so for me it vould be Vanguard Total World. In this case I would lose 15% of 50% of the total, which is the US part more or less. On top of that US doesn’t have treaties with all the countries so even an “total world” US fund lose some percent money on the ex-US part.
I think Ireland is one of the countries with the most favourable double income treatment, so probably in the end for a global world ETF it’s kind of a wash between US or IE based fund.

Instead for pure US ETF (like S&P500) then yes you get beack the whole 15 % and would probably make much more sense.

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If the ETF is purely or mostly US, US ETFs are better in most cases

However, do not underestimate these two points:
-Swiss brokers charge more to trade on US exchange than on the Swiss exchange.
-US ETF are traded in dollars, money need to be exchanged from CHF to $ which will cost between 0.9 to 2% depending on the broker

Swiss brokers charge more to trade on US exchange than on the Swiss exchange.

Swiss brokers charge more than anyone else in the world for anything.

-US ETF are traded in dollars, money need to be exchanged from CHF to $ which will cost between 0.9 to 2% depending on the broker

Ditch your current broker asap. IB charges practically a flat $2-3 per conversion for smaller amounts under $100k or so

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@hedgehog don’t worry I am moving. I have decided to have US investment with IB and keep Swissquote for emerging market

But I try to always give full info to offer the possibility to do run the numbers :wink:

To give another exemple, to have non-US ETFs with a US broker could be a “not so good idea” as dividends will be taxed at 15% which can be reimbursed by swiss tax authorities. However, you will have to wait few months to more than a year to be reimbursed.

so would you agree that the following describes the US estate tax situation correctly:
upon death, if you are a swiss citisen or resident,
below USD 60’000 of US-domiciled assets no taxes apply. Above 60k, the old Siwss-US-taxation treaty from 1952 kicks in: the tax-free limit is calcualated as
$5’230’000 * f
where f is the fraction of US domiciled assets of your total belongings.
Of your US-domiciled property, everything above the threashold is taxed roughly 40% (who knows?)

Example: if you are 100% in US domiciled stocks, you tax free threshold is $5.23M. if you have 20% of you assets in the US, it is $1.46M

Source NZZ
Source Deloitte
Source Credit Suisse
Source admin.ch

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Interesting point, I haven’t seen before that they prorate the exemption like that

It’s a progressive tax, rates vary from 18 to 40% currently. Progression rises quickly, so you can safely assume that if it comes to this tax having to be paid, you next of kin will be ripped off mercilessly by the IRS to the full extent of US tax law

If you have a very significant estate and you want to leave it to your children/family without the IRS having too much to say about it, setting up a trust/private foundation might be a good idea :

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Thanks nugget for aggregating these articles/documents.

Has anyone investigated setting up a Trust as suggested by Julianek? Anyone using one as a Trustee/Beneficiary? This might deserve its own thread.

So far I’ve found that the lawyer fees would be high and finding “trusted” trustees that will outlive you are not straightforward. But knowing that the passive income of an irrevocable trust could feed my heirs and their heirs without touching the principal would be the ultimate gift.

I am covered with a generous life insurance from my company so I don’t feel for now the need to hedge myself against the Estate Tax process (I am also well under the tax-free limit of $5M). If I leave my job one day, I would probably move my assets to Irish ETFs/Funds.

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