Understanding U.S. Estate Tax Treaties: Benefits for Non-U.S. Citizens vs. Implications for U.S. Citizens

Preview
U.S. estate tax treaties provide significant benefits for non-U.S. citizens but do not extend the same benefits to U.S. citizens. Here’s a detailed explanation of how these treaties work and the implications for both groups in 2025:

Benefits for Non-U.S. Citizens

  1. Exemption Amounts and Tax Rates:
    • For non-U.S. citizens, the U.S. imposes estate tax on U.S.-situated assets. The estate tax rate can be as high as 40%.
    • Non-U.S. citizens benefit from a small exemption amount of USD 60,000 from U.S. estate tax.
  2. Treaty Relief:
    • Many U.S. tax treaties with foreign countries provide relief from double taxation. This means that non-U.S. citizens can avoid paying estate tax on the same assets in both the U.S. and their home country.
    • For instance, under the Canada-U.S. tax treaty, Canadian residents who are not U.S. citizens can benefit from certain exemptions and tax relief measures when they own U.S. assets.
  3. Deferral Options:
    • Non-U.S. citizens can defer U.S. estate tax by using a qualified domestic trust (QDOT). This allows assets to pass to a non-U.S. citizen spouse without immediate taxation.

Implications for U.S. Citizens

  1. No Treaty Benefits:
    • U.S. citizens do not benefit from the same treaty provisions as non-U.S. citizens. They are subject to U.S. estate tax on their worldwide assets, not just U.S.-situated assets.
  2. Exemption Amounts:
    • For U.S. citizens, the basic exclusion amount for estates of decedents dying in 2025 is $13,990,000. This means that estates valued below this amount are not subject to federal estate tax.
  3. Higher Tax Rates:
    • The estate tax rates for U.S. citizens range from 18% to 40%, depending on the value of the estate.

Summary

  • Non-U.S. Citizens: Benefit from tax treaties that provide relief from double taxation, a small exemption amount, and deferral options through QDOTs.
  • U.S. Citizens: Do not benefit from the same treaty provisions and are subject to estate tax on worldwide assets, although they have a higher basic exclusion amount compared to non-U.S. citizens.
These distinctions highlight the importance of understanding the specific tax implications based on citizenship status when dealing with U.S. estate taxes.