The financial press has reported that the CEO of a popular video communications company has transferred $6 billion dollars’ worth of his shares of stock in a U.S. corporation.

A headline of this nature is obviously designed to get the attention of the reader even though the underlying article itself is light on specifics.

The article does however raise some interesting estate planning points that are worth reviewing.

If the taxpayer is a foreign national (not living/domiciled in the U.S.) owning stock in a U.S. corporation at the date of death, his estate is primarily liable for U.S. estate taxes at graduated rates that quickly rise to 40% of the taxable FMV of the shares.  The taxable amount is the excess of the FMV of the shares over a mere $60,000 exemption amount. There “may” be an opportunity to deduct a portion of administration expenses, debts etc. but for large estates the value of these deductions is typically limited.

The tax is payable to the IRS, in cash, 9 months after the date of death. For enforcement purposes (because of the non-U.S. parties involved and the risk of non-compliance) there is a regulation in place that provides that the transfer agent (for the U.S. corporation) shall not transfer the shares until a lien release from the IRS has been produced showing that the tax has been paid. Obviously, transfer agents are not anxious to transfer the shares until they are sure there will be no liability on their end.

These rules often come as a surprise to a foreign investor. For people who are in the U.S. market for the long haul, there are a variety of indirect ownership structures that can be considered to shield against this tax. Although these strategies can be highly effective, they are complex and take time to implement.

For non-U.S. investors who are inclined to make lifetime gifts as part of an estate planning exercise an interesting opportunity exists when it comes to shares of U.S. stocks. Although these shares are subject to a very harsh U.S. estate tax regime, they are not subject to the U.S. gift tax regime the way transfer by U.S. citizens and domiciliaries are. For non-U.S. investors shares of U.S. stock are considered intangible assets which are not subject to U.S. gift. Thus, large tax-free gifts (to a younger generation) are something that should be seriously considered by the foreign investor.

In the case of U.S citizens and foreign nationals domiciled in the U.S. the rules are much different. These taxpayers are subject to U.S. estate AND gift taxes on a worldwide basis (all assets). The same tax rate schedule applies (after more friendly deductions for administrative expenses and debts). Although the tax basis is worldwide, assets the exemption amount is much larger. For 2021, it is $11.7 million. This is scheduled to be reduced by the end of 2025.

It is important to stress that these are the U.S. rules and that other countries may tax the estate, donor or the beneficiary, making global estate planning advice very important.  It is important for taxpayers and advisors to consider the reporting impacts and risks that exist due to the information sharing regimes of the U.S. sponsored Foreign Account Tax Compliance Act (FATCA) as well as the OECD sponsored Common Reporting Standard (CRS).

It is worth noting that the concept of a U.S. wealth tax is back in the news. Although the proposals to date focuses on U.S. citizens, there is a provision in the leading proposal to assess a 40% tax on “ALL” U.S. citizens with a tax base greater than $50 million who relinquish U.S. citizenship.

There is a trend in the U.S. that is leaning toward taxing the wealthy. Other countries are strengthening their rules as seen with FATCA and CRS. If not planned for, these rules can be harsh.