Buying real estate in the U.S. requires careful planning: Life Insurance for foreigners

Life Insurance for Foreigners: Foreign investors are recognizing the financial opportunity for investment in the U.S. real estate market. However, before ratifying a real estate contract for the purchase of property on U.S. soil, the foreigner should seek competent legal advice in order to properly structure the investment, taking into account with due consideration the investor’s goals and the possible treaty benefits that may apply.

After-the-fact structuring poses many hurdles, and given the complexity of the U.S. tax laws, one less hurdle, the better.

When a foreigner dies owning U.S. real property, his estate faces heavy taxes. Few realize that a foreign investor in U.S. real property is subject to U.S. federal estate tax at a Federal rate of up to 55% (2011) (often with an additional state estate tax) and with only a $60,000 exemption on the full fair market value of the property unreduced by any recourse mortgage loan. Thus, on a $1 million investment, if the foreigner dies, the federal estate tax will be approximately $500,000 (plus state estate tax depending on where the real property is located). Many states have repealed their estate tax, but some states continue to tax.

 

An estate tax treaty may increase the $60,000 explicable exclusion amount; however, there are only 16 current estate tax treaties with the U.S. So, if the foreign investor is not from Australia, Austria, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, The Netherlands, Norway, Republic of South Africa, Switzerland, or the United Kingdom, then the investor will be subject to the regular exclusion and rates.

 

So, what is the solution? One solution is to obtain a life insurance policy sufficient to pay the U.S. estate tax.

 

Leo passes away in 2014, his estate is comprised of only a $300,000 condo in his estate. If he is a U.S. citizen or resident alien his estate does not any federal estate taxes, whereas if he is a NRA his estate owes $132,000 in federal estate taxes.

So, what estate planning tools are available to a NRA to combat these severe federal estate tax rules? One of the primary tools is an Irrevocable Life Insurance Trust (“ILIT”). An ILIT is typically utilized to remove a decedent’s life insurance proceeds from his taxable estate so that upon his passing, his life insurance proceeds go directly to his beneficiar(ies) without passing probate and without incurring any federal estate tax.

An ILIT is especially useful for an individual whose estate exceeds the federal estate tax exemption, whether it is $1,000,000 for U.S. citizens and residents, or $60,000 for NRAs. For the NRA whose estate exceeds $60,000, he should purchase a life insurance policy for the anticipated amount of taxes that will be owed on his estate, place this policy in an ILIT, and name someone other than himself as a trustee and beneficiary. The purpose of this setup is so that at the NRA’s death, the proceeds from the life insurance policy in the ILIT can pay the federal estate taxes owed on his estate. Let’s re-examine the hypothetical above, but this time Leo had set up an ILIT.

Leo, a NRA, passes away in 2014, his estate is comprised of only a $300,000 condo. Leo set up an ILIT for $132,000, naming his son, James, as the beneficiary; Leo also set up a living trust passing his condo to James. At Leo’s death, the condo and the $132,000 in life insurance proceeds directly pass to James. The federal estate taxes owed on Leo’s estate is, like before, still $132,000, owed 9 months after his death. James uses the $132,000 in life insurance proceeds to pay the taxes owed on the condo. James now owns the condo outright, with no further debt or taxes to pay.

Questions? Call Mintco Financial Advisors at 813-964-7100 or get a free Life Insurance quote.

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