U.S. Estate Tax Implications for Wealthy EB-5 Investors
Investing in the EB-5 Immigrant Investor Program offers a path to U.S. residency, but high-net-worth individuals must carefully consider the significant U.S. estate tax implications that arise upon becoming U.S. residents or domiciliaries. Unlike income tax, estate tax applies to the worldwide assets of a U.S. domiciliary upon death.
Understanding U.S. Domicile and Residency
For estate tax purposes, the distinction between a resident alien and a non-resident alien is critical. Establishing domicile in the U.S., often achieved through substantial presence or intent to reside indefinitely, subjects the investor to U.S. estate tax on their entire global net worth.
- Domicile vs. Residency: A person can be a U.S. resident for income tax purposes without being domiciled for estate tax purposes, though the lines often blur for long-term green card holders.
- Inclusion of Worldwide Assets: A U.S. domiciliary is taxed on assets held globally (e.g., foreign real estate, overseas bank accounts).
- Non-Resident Alien Status: Non-resident aliens are only subject to U.S. estate tax on their U.S.-situs assets (e.g., U.S. real estate, stock in U.S. corporations).
The Estate Tax Exemption Gap
The most pressing concern for EB-5 investors is the disparity between the generous estate tax exemption available to U.S. citizens and the significantly lower exemption for non-citizens or those deemed non-domiciliaries.
Exemption Amounts Comparison
As of 2024, the unified credit exemption for U.S. citizens is substantial, but non-resident aliens face a much lower threshold:
- U.S. Citizens/Domiciliaries: Exemption near $13.61 million per person.
- Non-Resident Aliens: Exemption limited to only $60,000 of U.S.-situs assets.
Any value exceeding the applicable exemption limit is subject to federal estate tax rates, which can reach up to 40%.
Structuring EB-5 Investments to Mitigate Exposure
Wealthy investors often hold assets through various structures. Understanding how the IRS views these structures is paramount when planning for estate tax liability.
Situs of Assets
The location of the underlying asset determines its inclusion in the taxable estate for non-domiciliaries:
- U.S. Real Property: Always U.S.-situs.
- Stock in U.S. Corporations: Always U.S.-situs, regardless of where the stock certificate is held.
- Stock in Foreign Corporations: Not U.S.-situs, even if the underlying assets are U.S.-based.
For investors holding assets through foreign entities, careful structuring is necessary. Holding shares in a foreign holding company that, in turn, owns U.S. real estate may potentially shield the asset from U.S. estate tax if the investor remains a non-resident alien.
// Example of potential avoidance for non-domiciliaries:
// Foreign Investor owns Foreign Corp.
// Foreign Corp owns US Real Estate.
// Stock in Foreign Corp is generally NOT U.S. Situs property.
Marital Deduction and Treaties
The unlimited marital deduction, which allows transfers to a surviving U.S. citizen spouse free of estate tax, is often unavailable if the surviving spouse is not a U.S. citizen. In such cases, assets must often be placed into a Qualified Domestic Trust (QDOT) to defer the tax until the surviving non-citizen spouse passes away or until principal distributions are made.
Furthermore, investors should review any estate or inheritance tax treaties between the U.S. and their country of citizenship, as these treaties can override standard U.S. tax law regarding situs determination or provide additional credits.
Conclusion and Planning Imperatives
The transition to U.S. residency via the EB-5 program necessitates immediate and comprehensive estate planning. Failure to address potential U.S. domicile status can result in significant future estate tax liabilities on worldwide assets. Investors should consult with specialized international tax and estate planning attorneys before obtaining permanent residency to implement strategies that align their investment goals with their long-term estate objectives.