The Estate Tax Surprise Waiting for US-Connected Families 

Of all the issues facing US-Connected Persons living internationally, estate and gift tax planning may be the one most consistently deferred, most widely misunderstood, and most catastrophically expensive when it catches families unprepared.

The United States imposes a federal estate tax on the worldwide assets of its citizens and domiciliaries at rates of up to 40%. For non-US persons — including many spouses, partners, and family members of US citizens — it imposes a narrower but still significant tax on US-sited assets. Understanding which regime applies to you, and where the traps are, is essential planning for any internationally mobile family.

The Worldwide Reach of US Estate Tax

US citizens are subject to US federal estate tax on their worldwide assets at death — regardless of where they live, where the assets are held, or whether those assets have ever touched American soil. For 2024, the federal exemption is $13.61 million per individual ($27.22 million for married couples), indexed for inflation.

That exemption sounds large. But there are two critical warnings:

• Sunset provision: Under current law, the elevated exemption amounts introduced by the Tax Cuts and Jobs Act of 2017 are scheduled to revert to approximately $7 million (inflation-adjusted) per person after December 31, 2025 — absent congressional action. For families with meaningful assets, this is an urgent planning consideration.

• State estate taxes: Many US states impose their own estate taxes with exemptions as low as $1 million and no portability between spouses. A US citizen domiciled abroad may still be subject to state estate tax in their last state of domicile.

The Non-Citizen Spouse Problem

US tax law treats a surviving non-citizen spouse very differently from a surviving US citizen spouse. Under normal rules, assets passing to a US citizen spouse at death qualify for an unlimited marital deduction — no estate tax, regardless of amount. This deduction is not available for a non-citizen spouse.

A US citizen with a non-citizen spouse who passes away leaving a significant estate may trigger substantial estate tax at the first death — a result that would not occur if both spouses were US citizens or if proper planning structures were in place.

The primary planning tool for this situation is a Qualified Domestic Trust (QDOT) — a specially structured trust that allows assets to pass to a non-citizen spouse while deferring estate tax until distributions are made. But a QDOT must be established before death, and the trust requirements are specific and technical. It is not something that can be organized retroactively.

Non-US Persons and US-Sited Assets

For non-US persons — including non-citizen, non-resident individuals — US estate tax applies only to US-sited assets. But the definition of 'US-sited' is broader than many people expect:

• US real estate

• Shares in US corporations (even held through foreign accounts or nominee arrangements)

• US bank deposits (with limited exceptions)

• US-based life insurance policies on the life of the decedent

The exemption available to non-US persons for US-sited assets is only $60,000 — not the multi-million dollar exemption available to US citizens. A non-US family member who inherits a US stock portfolio or a US property interest may face estate tax on virtually the entire value.

Gift Tax: The Often-Forgotten Partner

US gift tax applies to transfers of property during life, and for US citizens, it applies to worldwide transfers. The annual exclusion for 2024 is $18,000 per recipient. Gifts to a non-citizen spouse are subject to a separate annual exclusion of $185,000 (2024, indexed).

Large lifetime gifts reduce the donor's estate tax exemption dollar for dollar — the estate and gift tax are unified. Gifts made within three years of death may be pulled back into the taxable estate in some circumstances.

For non-US persons, gift tax applies only to transfers of US-sited tangible property — shares in US companies transferred during life by a non-US person are not subject to US gift tax, which creates planning opportunities that estate tax alone does not.

Planning Across Borders

The intersection of US estate and gift tax with foreign succession law, forced heirship rules, and non-US estate planning structures creates complexity that demands specialist advice. Some of the most common planning considerations for US-Connected families:

• Review and update wills and beneficiary designations to reflect cross-border asset structures.

• Evaluate QDOT structures for US citizens married to non-citizen spouses.

• Consider life insurance as an estate liquidity tool — particularly for illiquid assets like real estate or private business interests.

• Assess the impact of the 2025 exemption sunset on current estate plans.

• Understand how foreign situs assets interact with the US estate tax, particularly in countries with no bilateral estate tax treaty with the US (most Asian jurisdictions have none).

Estate planning for US-Connected families is not a 'someday' exercise. The best time to address these issues is before a triggering event — not during one.

Next in the series: the quiet offboarding happening in global financial services, and why US-Connected Persons are increasingly finding that their passport is the reason a bank or broker won't work with them.