Estate tax on US shares

The US stock market is the most important market in the world, so it naturally attracts investors from all over the world. However, the US tax system has some special laws, which also affect the investments. Did you know that by investing directly in US shares, you run the risk of a high estate tax?

Ján Jursa | Investment academy | 8. April 2021

Estate tax applies to anyone who, at the time of death, owns any US assets, be it real estate in Florida or Apple shares. For US citizens, the limit at which they have to pay estate tax is around several millions, for non-resident aliens, the limit is at $ 60,000.

Non-resident aliens (NRAs) are, from the US perspective, people who are not US citizens, do not live in the US and do not hold a green card. In practice, the vast majority of the world falls into this category, i.e., Slovak tax residents who own assets in the USA, such as shares.

If you are an NRA, all of your "American" assets are taxed after death. The tax rate rises with asset volume up to the maximum rate of 40% for asset volume over $ 1 million. We are used to pay profit tax in various situations, but in this case, taxable amount is calculated from the entire value of the assets. Thus, your children might end up having to pay a lot to the IRS - the American tax office, which, among other things, managed to get even Al Capone behind bars.

This is not the case for tax residents of 16 countries with which the United States has concluded agreements governing these taxes. Unfortunately, the Slovak Republic is not among them. From the neighboring countries, the most interesting is probably Austria, whose tax residents’ shares are exempt from the tax at the time of death.

How to invest and minimize tax?

An intelligent investment always takes into account the effects of possible taxes, which can significantly reduce profits or assets. Fortunately, even the estate tax can be easily avoided without having to sacrifice the growth and profits of American companies.

The solution is – as expected – ETFs. However, ETFs with a US domicile, such as well-known funds tracking the S&P 500 VOO or SPY, will not save you- they are still considered as US securities.

On the other hand, ETFs domiciled in Europe can still invest in American companies, but they are not "American assets" and thus the estate tax does not apply. Many administrators such as iShares or Vanguard create copies of their ETFs in Ireland or Luxembourg. One of the reasons is the impact of estate tax on non-US investors.

Finax makes use of exactly these funds in its clients’ portfolios, which means that intelligent investors avoid the US estate tax.

Speculating is not worth it

Investors that try to pick specific stocks and outperform the market usually invest in the US, in a mature market with hundreds of technological start-ups. The search for another Apple or Amazon rarely takes place on the Old Continent.

Only a few will be able to outperform the market in the long run. If you include the risk of losing up to 40% of your assets after death, investing on your own suddenly looks much worse.

For example, if you manage to acquire assets in US shares during your lifetime in the amount of let’s say EUR 300 000, in the event of your death, your descendants will have to pay more than EUR 90 thousand on estate tax to the American tax office. In the end, they will have less than 70% of the acquired assets.

Whether you're investing in US ETFs to keep the costs down, or buying Tesla stocks directly, be careful if you don't want to deprive your family of big money.

Invest intelligently with optimal taxes and minimal risk.

Schedule a 15 minute phone call for free

We will help you get started and learn more about Finax.

 



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Ján Jursa
Ján Jursa
Chief Analyst
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