Yeah, the guys here convinced me. Like a month later from that post I opened an account at IB. Currently I have both CT and IB. Once you learn how it works it’s not so scary anymore.
There are 2 thresholds, both from national US law, as Switzerland did not get preferential treatment (but neither worse).
$60k of investments is the absolute low water line. No tax until crossed and no tax declaration either.
Then there is the relative calculation mentionned here and which changed recently. This determines the amount on which 40% estate tax has to be paid.
This can be checked @the links posted - or not. Sometimes it’s more complex than reading three pages.
Just to clarify, this estate tax only applies once you die or it is something you have to consider on a yearly basis?
@hedgehog: if I read Bojack comment, then he is writing the opposite. However am I right to assume that all of this only applies in case of death?
No, I wrote exactly what @hedgehog is saying. Maybe let’s clarify the confusion.
Estate tax is a tax paid upon death. It quickly reaches the rate of sth like 40%, so it hurts. But American residents have an exemption, currently of around 11 million USD. So when they die, and they have an estate of under 11 million, their heirs don’t pay this tax when inheriting their fortune.
However, by default, foreign holders of US assets are subject to estate tax with an exemption of only 60’000 USD. So if you kick the bucket, your family will have to cough up 40% of your US assets over the mentioned 60’000.
But! Switzerland has a deal with US, which lets Swiss people and Swiss domiciled foreigners (like us), to be treated like Americans if we die! So we can enjoy the 11 million tax-free exemption. But if you one day leave Switzerland to a country without a deal, then you better sell these American assets.
Was that clear enough?
What @Bojack writes reflects also what I know. He simplified one point in the interest of clarity. The US relative exemption, as calculated by the treaty, is not an absolute value (like 11 million atm).
@nugget explained it above, for the old value (5.2, not 11 million)
The tax limit has not been raised permanently, but it will sunset:
The tax bill, passed by the House and Senate yesterday, temporarily doubles the exemption amount for estate, gift and generation-skipping taxes from the $5 million base, set in 2011, to a new $10 million base, good for tax years 2018 through 2025. The exemption is indexed for inflation, so it looks like an individual can shelter $11.2 million in assets from these taxes. Another federal estate law provision called portability lets couples who do proper planning double that exemption. So, a couple could exclude $22.4 million for 2018. Watch out: The law’s sunset means that, absent further Congressional action, the exemption amount would revert to the $5 million base, indexed.
The estate tax (or death tax, as our Republican friends call it) is politically contentious. Bush II abolished it, Obama reintroduced it to pay for Obamacare. Thanks Obama?!
My second last point is this: When above or around $60k, your heirs need to file a US tax declaration, even if you would not have to pay estate tax due to the relative limit. This concerns your whole estate (due to f, see nugget’s post). All your assets above a low value have to be estimated and certified. Please also remember that a qualified intermediary broker is responsible for your compliance with US tax laws (simply put).
My last point is this: Better don’t consider dying holding US situs assets above $60k if you leave LOVED ones.
Thank you for reminding me of this. It’s true, I tried to provide a clear explanation.
So this pro rata thing works like this: If you own 11 million US assets and 11 million non-US assets, your exemption will be 11 mln * 50% = 5.5 mln. I would like to have to consider such potential problems.
Why? You mean it’s a complicated mess and they will need to fight in order not to pay estate tax in the full? I don’t know how it works in practice, but if you died holding 1 mln worth of VT, they could pay a good lawyer to avoid this tax?
Yes, the more US situs assets you have, the higher the limit will be. Don’t forget to also count any real estate, pension, 3a, non-US situs shares and etc. assets. If only 30% of your assets are US ones, then the tax free limit would roughly be at 3.3 million. If the sunset kicks in, roughly 1.56 million. If you invest today 150k and never add a penny, then you would roughly be at that 1.56 million limit after 30 years (assuming historical 8% stock market returns; 30 years since it’s running past normal retiring age). 40% of potential returns - and principal - above that to Uncle Sam is a risk.
In your example, an estate of 22 million would pay 2.2 million to Uncle Sam which probably is still a bit of a downer.
Ok, 1 million VT. You won’t find tax lawyers working below CHF 300/h. I paid good ones 400/h.
Now, should the lawyer make the declaration? In this case, he will become personally responsible to IRS of its correctness. He/she will ensure that all your assets are catalogued, estimated and the estimates certified. He/she has to give out those jobs and control the work. You have to pay those experts in addition to the lawyer. Do you have real estate, art, a car in value over 10k, a horse etc? Moreover, the declaration itself and all communications with IRS, even reading simple letters. Everything at 400/h. During this time, your loved ones cannot access the money at the broker.
Or do you just want to have the advice of the lawyer and let your grieving family do the additional work? It will still cost you.
If you set in an executor, then the executor will hire the tax lawyer - another layer of cost. You will pay the letters they send to each other twice (drafting/reading etc).
All of the above is just for the normal US-declaration. Their system is different. In CH you just have to name everything and the state applies the law and calculates the tax. In the US, land of self-responsability, you are responsible for correctly applying the law and calculating your taxes. IRS is basically here to check you. They demand proof for valuations in such cases as ours discussed here.
In all cases, your loved ones ROI is severly impacted and they have more work. Also, they can’t finish the repartition of your estate until IRS gives green light. This will happen in due time and certainly not overnight.
Will all of these risk materialize? I hope and think not. I write them down so that YOU can make the call for yourselves about investing in US situs assets informed and clear-eyed.
I personally chose to do it. The profitability is much better. Vanguard US works as a collective, with the fund-share-owners as principals. This sets the incentives correctly. Vanguard non-US is differently structured. As to the risk, I think it raises with age while I hope that European TERs should hopefully come down. Everybody has to make his or her own call.
This post is one of the reasons a Wiki would be better to get info rather than a forum. If you don’t read a forum in the right order (time), you’ll get only confused.