A foreign trust can hold a condominium in Miami and a custody account full of stock of U.S. corporations. Families assume the word "foreign" answers the U.S. estate tax. It does not. Estate tax for a non-resident alien and income-tax classification of the trust are different statutes. One can be favorable while the other is not. This note separates them. The general estate-tax problem for foreign nationals is on Wealth Structuring for Foreign Nationals and in Irrevocable Trusts and the $60,000 Exemption. The Spanish note on assets inside the trust is activos de situs estadounidense dentro del foreign trust.
What is in a non-resident alien's U.S. gross estate
Section 2103 includes in the gross estate of a decedent who is not a citizen and not a U.S. resident only the part of the gross estate situated in the United States. Section 2104 treats stock of a domestic corporation as property in the United States. It does not matter that the shares are held in an account in Zurich, Panama, or Miami. The account is not the asset. The share is. U.S. real property is situated in the United States. Section 2105 excludes, among other things, stock of a foreign corporation and, on conditions, bank deposits that are not effectively connected with a U.S. trade or business. A brokerage account is not a bank deposit. Life insurance on the life of a non-resident alien has its own exclusion under section 2105(a). The credit under section 2102(b) shelters $60,000 of taxable estate. That figure is the one that matters here. Treaty relief is rare for the Latin American residences we most often see, and it is a tax-adviser question when a treaty actually applies.
Partnership and LLC interests are not stock of a domestic corporation, and they are not automatically foreign because the agreement says so. Situs for those interests is its own analysis. We do not treat them as if they were Apple shares, and we do not treat them as if they were a Cayman company, without reading what the interest actually is.
The trust does not vote; the retained powers do
If the non-resident alien owned the U.S.-situs property at death, it is in the U.S. gross estate. If the property is in a trust, the question is whether the decedent is still treated as owning it. A revocable foreign grantor trust — the pattern section 672(f)(2)(A) often requires for grantor status — is the pattern in which a power to revoke keeps the U.S.-situs assets inside sections 2038 and, where income or enjoyment was retained, 2036. The FGT can be the right income-tax answer for distributions to U.S. children and the wrong estate-tax answer for the condominium. Those two results are allowed to be true at the same time.
An irrevocable transfer that is complete, with no retained right to income, enjoyment, or the power to change who takes the property, is how U.S.-situs assets leave the estate. The cost is that the trust is then usually an FNGT, and U.S. beneficiaries face DNI, UNI, and Form 3520 on distributions. See FGT vs. FNGT and When the Foreign Grantor Dies. Lifetime gifts have a further asymmetry, already covered in U.S. Gift Tax for Non-Resident Aliens: section 2501(a)(2) generally does not tax a non-resident alien's gift of intangible property, while the same U.S. stock held at death is in the estate. Real property and tangible property located in the United States are within the gift tax. The asymmetry is a reason to plan the transfer. It is not a reason to ignore title.
Income tax and FIRPTA are not the estate tax
Dividends on U.S. stock and rent from U.S. real estate raise withholding and income tax for a foreign owner. If the trust is an FGT, that owner is often the foreign grantor. If the trust is an FNGT, the owner is the trust. Neither answer is the estate-tax answer. A sale of U.S. real property by a foreign person brings FIRPTA withholding under sections 897 and 1445, which is a tax on disposition, computed and withheld during life. We have a separate note on FIRPTA and foreign investors. Holding the real estate inside the trust does not turn FIRPTA off. It identifies the foreign person who is the transferor — grantor or trust — which the closing agent will ask in any event.
A foreign corporation between the individual and the U.S. stock can change estate-tax situs, because foreign stock is generally not U.S.-situs property. That sentence is the start of a structure, not the end of one. The company can be a PFIC or a CFC the day a U.S. person appears, and U.S. real estate inside a foreign corporation is a FIRPTA problem of its own. Classification of the company is a Form 8832 question. See The Form 8832 Election and PFIC Rules. We coordinate that architecture. We do not hand the family a jurisdiction and call it an estate-tax solution.
What the inventory looks like
List each asset the trust holds. Mark U.S. real property, stock of domestic corporations, stock of foreign corporations, bank deposits, and everything else. Then mark the powers the settlor still holds. The estate-tax exposure is the overlap of U.S.-situs property and retained powers, plus anything the settlor owns outside the trust. The income-tax exposure is whether the trust is an FGT or an FNGT, and what a U.S. beneficiary receives. Writing both lists on one page is the work. A cover memo that says "held in a foreign trust" is not.