US Estate Tax Limits for Australian Expats

Understanding US Estate Tax Limits for Australian Expats

Investing in the United States offers Australian expats incredible opportunities—from prime real estate in iconic cities like New York to stocks in global corporate giants. Yet, these exciting ventures come with their share of responsibilities, especially when it comes to estate taxes.

US estate tax can be a costly consideration for non-residents owning US-domiciled assets. With tax rates ranging from 18% to 40% and a remarkably low exemption threshold of just $60,000 for non-residents, it’s easy to see how estate tax liabilities can add up quickly. Fortunately, the US-Australia Estate Tax Treaty offers a lifeline, but understanding how it works and using it effectively is key.

In this guide, we’ll walk you through the ins and outs of US estate tax limits, how the treaty benefits Australian expats, and strategies to minimise your exposure.

Why Australian Expats Need to Care About US Estate Tax

US investments like real estate and corporate shares are classified as “US situs assets,” which means they’re subject to US estate tax. Without the right planning, your beneficiaries could face significant tax liabilities on your hard-earned wealth after your death.

By understanding the rules and exemptions, you can take proactive steps to ensure your investments remain a legacy rather than a liability. Estate tax planning isn’t just for the ultra-wealthy—anyone with US assets exceeding the $60,000 exemption threshold is at risk of incurring estate taxes.

Key Facts About US Estate Tax

For Australian expats, there are a few key details to understand about US estate tax:

• What Are US Situs Assets?
  These include tangible property like real estate and personal property located in the US, as well as intangible assets such as shares in US corporations.
• Tax Rates
  US estate tax operates on a progressive scale ranging from 18% to 40%. The more valuable the assets, the higher the tax rate.
• The Exemption Threshold
  Non-residents have an exemption limit of just $60,000, compared to $13.99 million for US citizens.

Interestingly, under the US-Australia Estate Tax Treaty, Australian expats can often benefit from higher effective exemption thresholds, as discussed below. However, recent discussions about potential changes to these thresholds highlight the importance of seeking professional advice to stay updated.

How the US-Australia Estate Tax Treaty Helps

The US-Australia Estate Tax Treaty is a powerful tool for Australian expats to minimise or eliminate estate tax liabilities. Here are the primary benefits:

• Unified Credit
  Australian residents can access a proportional share of the unified credit that applies to US citizens. This credit can raise the effective exemption limit significantly.
• Relief From Double Taxation
  The treaty ensures that Australian expats are not taxed twice on the same assets. It provides clear rules about which country has taxing rights, so you’re not caught in the middle.
• Deductions and Exclusions
  The treaty allows deductions for debts, expenses, and taxes and offers exclusions for certain types of assets. This further reduces the taxable estate.

Unified Credit for Australian Expats

A crucial part of the treaty is the prorated unified credit, which is calculated based on the proportion of your US situs assets relative to your global assets.

For example, let’s say in 2024, the unified credit for US citizens is $13 million. An Australian resident with $1 million in US situs assets and $5 million in worldwide assets could calculate their effective exemption like this:

Prorated Unified Credit:
(US Situs Assets / Worldwide Assets) × Unified Credit
(1,000,000 / 6,000,000) × 13,000,000 = $2,166,667

With an effective exemption of $2,166,667, this individual would owe no US estate tax. This example underscores the treaty’s value in protecting Australian expats from steep tax bills.

Strategies to Minimise US Estate Tax Exposure

Australian expats can use several strategies to reduce their US estate tax exposure:

• Switch to Non-US Situs Assets
  Replace US-domiciled assets like ETFs or mutual funds with alternatives domiciled in other jurisdictions.
• Leverage Annual Gift Exemptions
  Use annual gifting limits to transfer assets to non-US citizen spouses or other recipients to reduce taxable assets.
• Consider Alternative Ownership Structures
  Certain ownership structures could shield assets from estate tax liability.

These strategies require careful planning to ensure they align with your overall financial goals and comply with relevant regulations.

The Importance of Staying Updated

Tax laws are constantly evolving. While the US-Australia treaty currently provides significant relief, discussions about potential changes to exemption thresholds or treaty terms make it essential to seek regular advice. An estate planning professional can help you adapt to changes and ensure your plans remain effective.

Conclusion

For Australian expats, US estate tax may seem complex, but with the right knowledge and planning, it’s manageable. The US-Australia Estate Tax Treaty provides a range of benefits, including increased exemptions, relief from double taxation, and deductions that can significantly reduce liabilities.

By understanding the rules, leveraging the treaty, and working with expert advisors, you can protect your investments, safeguard your wealth, and leave a lasting legacy for your loved ones.

Key Takeaways

• US estate tax applies to non-residents with US situs assets, with a low exemption threshold of $60,000.
• The US-Australia Estate Tax Treaty offers critical relief, including prorated unified credits and deductions.
• Proactive planning, such as switching to non-US situs assets and using alternative ownership structures, can potentially minimise liabilities.
• Always stay informed of potential changes to tax laws and seek expert advice for tailored solutions.

Ally Wealth Management is the trusted ally in finance for Australians at home and across the globe. As both Australian expats and residents, the founders of Ally have a unique understanding of the common personal financial challenges faced.

Book your complimentary appointment with our team at Ally Wealth Management to discuss how we can help you to achieve your financial goals.

Ally Wealth Management Pty Ltd is a Corporate Authorised Representative of Sentry Advice Pty Ltd ABN 77 103 642 888. Sentry Advice holds an Australian Financial Services Licence (AFSL) No. 227 748.

General Advice Warning: The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances, and objectives. We recommend you obtain professional financial advice specific to your circumstances.