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Nonresident aliens and estate tax provisions

Dear Tax Talk,
If two NRAs (nonresident aliens) maintain a joint account with rights of survivorship, holding U.S. situs assets, and one tenant passes away, are the assets subject to U.S. estate tax? What tax document does the IRS require?
-- Wendy

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Dear Wendy,
A person is a nonresident alien for estate tax purposes if the person is not domiciled in the United States at the time of his death. The rules are a little different from those for income tax. For example, a person can be considered a resident alien for income tax purposes because of the time she spends in the country, but still be considered a nonresident for estate tax purposes because hshe does not permanently reside here. Therefore, in estate tax we refer to this person as a nonresident alien domiciliary, or NRAD, to avoid confusion with the income tax rules.

U.S. situs assets are assets that are considered to be from U.S. sources and subject to the estate tax. For most NRADs, this usually consists of stocks in U.S. companies and real estate. Additional details for U.S. situs assets can be found on Page 2 of Form 706-NA.

In a joint account, each person is usually considered to own one-half of the account, unless it can be demonstrated that the funds truly belong more to one than the other. For example, an elderly parent may wish to include a child on the account for convenience at his or her death, but the funds may be actually only the parent's. In this case, the IRS would consider the account to be wholly the parent's, absent proof to the contrary. Accordingly, the part of the account belonging to the tenant that dies would be subject to estate tax on his or her portion of the U.S. situs assets.

Unlike the rules for citizens or residents, an NRAD's assets that are exempt from estate tax have not increased. An NRAD's exemption is only $60,000. Certain death-tax treaties calling for nondiscrimination may increase this exemption to the level a U.S. citizen or resident receives. Page 2 of Form 706-NA has a list of treaty countries, but check carefully the nondiscrimination provisions of your decedent's country of residence before coming to any conclusions.

Bankrate.com's corrections policy -- Posted: Dec. 15, 2005
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