When it comes to cross-border estate matters it is important to consider the impact of estate tax treaties. With the right guidance, these tax treaties can be applied to significantly reduce tax obligations resulting from estate matters. The United States has entered into estate tax treaties with several countries, including Germany, the United Kingdom, Canada, France, and others. These treaties aim to prevent double taxation of estates and provide guidelines on which country has the right to tax the estate or inheritance. For non-U.S. citizen beneficiaries who are residents of these countries the state Tax Treaties can play a crucial role in determining tax liabilities.
Preventing Double Taxation
One of the most important aspects of estate tax treaties is the mechanism for preventing double taxation. Without an estate tax treaty, non-U.S. citizens inheriting from a U.S. citizen could face estate taxes both in the U.S. and in their home country. This is particularly relevant for German beneficiaries, as Germany has inheritance taxes that can apply to U.S. assets if the treaty isn’t applied. The treaty allows German residents to receive a credit for estate taxes paid in the U.S. on U.S.-situs assets. This means that if the U.S. estate taxes are paid first, the amount paid can be used as a credit against German inheritance taxes, potentially eliminating or reducing the need to pay duplicate taxes.
Determining Situs of Assets: U.S.-Based vs. Non-U.S.-Based Assets
The situs, or location, of assets, determines whether they are subject to U.S. estate taxes. In general, U.S.-situs assets include real estate located in the United States, personal property in the U.S., and shares/stock of U.S. companies. The US-German Estate treaty, however, states that owning shares of a U.S. corporation is not subject to U.S. estate taxes. Additionally, according to the treaty most tangible personal property and intangible property, like intellectual property, are not subject to U.S. estate taxes either.
For German residents inheriting U.S. assets, correctly applying the U.S.-Germany Estate Tax Treaty is an essential tool in international estate planning. By preventing double taxation and providing several tax benefits, the treaty ensures that beneficiaries are not overburdened by tax liabilities across two countries. At Urban Thier & Federer, P.A., our team of German and U.S. lawyers is well-versed on these matters and can provide expert legal and tax advice. Contact us today if you have questions about estate planning or international inheritance matters.