Are you a non-US citizen who doesn’t live in the US but invests in US markets?

At death, your US situated assets, including funds, ETFs, cash in US-based brokerage accounts, and 401k accounts are subject to upto a 40% tax.

Think this doesn’t apply to you? Think again.

Let’s assume that you used to live in the US (like I did) for many years, and your brokerage account in the US holds > $60,000 of the S&P 500 via an ETF. When you die, your brokerage is forbidden from transferring your assets until the IRS has concluded its estate tax audit.

US citizens and resident aliens that are domiciled in the US get an $11.2 million exemption (i.e. only US situated assets above this amount are subject to estate tax).

The equiv amount is $60k for non-resident aliens. The marginal rate grows to 40% at $1M

How do you avoid this?

Non-US investors who want to access the US markets should invest in Ireland Domiciled ETFs, also called UCITS schemes. Every major ETF has an equivalent LSE listed one.

e.g. $IVV => $CSPX

Fees are higher, but they pay for themselves. Here’s how:

$CSPX (and others) are “accumulating” funds. $IVV and other US ETFs that track the same index as ‘distributing’ funds. So in the former, dividends are automatically reinvested.

Ireland the US have a tax treaty, so dividends are taxed at a reduced rate of 15%, instead of the default withholding rate of 30%.

Sure, there are tax treaties for dividend withholding, e.g. US dividends paid to Indian residents where the holders owns less than 10% of the voting stock is withheld & taxed at 25% (instead of 30%).

But that’s still more expensive than the 15% tax rate with Ireland, where the dividend will reinvested and compound pre-cap gains, with the added benefit of no estate tax hassles, because Ireland domiciled ETFs are not considered ‘US-situ’ assets.

Ireland domiciled ETFs have slightly higher fees than their US domiciled, but the additional fees more than offset the cost of taxes.

There are also tax treaties that relax the estate tax restrictions, more here: https://www.irs.gov/businesses/small-businesses-self-employed/estate-gift-tax-treaties-international

And there’s more detail on estate taxes in general here: https://www.irs.gov/individuals/international-taxpayers/some-nonresidents-with-us-assets-must-file-estate-tax-returns

If you’re a founder, this $60k limit also applies to illiquid investments, such as your ownership of your US-incorporated SaaS company or you angel investments.

Tagging folks that I think this may be relevant to: @ankitpansari_ @deepakshenoy @skirani @saasboomi

There are also exemptions for non-US citizens not resident in the US that are married to US citizens. For those, the IRS allows you to defer the estate tax liability until the death of the US citizen spouse if you transfer the estate to a Qualified Domestic Trust (QDOT).