U.S. Estate Tax Filing Procedures

That property located in the U.S. is subject to U.S. estate tax

Whether or not ancillary proceedings are required, U.S. federal and state taxes may be imposed on property located in the United States. It does not matter whether the decedent or heirs were Japanese citizens or not, or whether the decedent or heirs were domiciled in Japan at the time of the decedent’s death. Property located in the U.S. is subject to estate tax regardless of the nationality or address of the heir or decedent.

Whether the property is located in the U.S.

As to whether the property is located in the U.S., the above discussion applies. The above mentioned points apply to property located in the U.S. If tangible property such as real estate (house, apartment, condominium) or personal property (car, furniture, artwork) is physically located in the United States, it is considered property within the United States. In contrast, securities such as bank deposits in U.S. financial institutions, shares issued by U.S. companies, and units in U.S. investment partnerships are considered property located in the U.S. for federal estate tax purposes and are subject to taxation. Whether state estate taxes are imposed varies from state to state.

Partnership interests formed in the U.S.

The issue is whether partnership interests formed in the U.S. can be said to be property located in the U.S. If they are property in the U.S., which state they are located in is determined by various factors, including the location of the partnership (e.g., Connecticut), the location of the partnership property (e.g., New York), the location where the partnership is doing business (e.g., New York), and the location of the general partners and representatives of the partnership (e.g., Florida). It is likely that a partnership interest formed in the U.S. will be considered property located in the U.S. for federal estate tax purposes.

Federal Estate Tax Basis

The federal estate tax exclusion amount for aliens is $60,000, which means that if the fair market value of property located in New York State (and the value of property gifted during your lifetime) exceeds $60,000, you will be subject to a federal estate tax of approximately 40% on the portion of the value in excess of $60,000. Thus, estate taxes in the U.S. can be extremely high. In addition, state estate taxes are also imposed, so the total tax amount can be extremely high (close to 50% of the market value of the estate.) As of fiscal year 2022, if the market value of your estate in New York State is $6.11 million or more, you will be subject to paying New York State estate taxes.

For countries that have an estate tax treaty with the United States

If a foreign national dies leaving property in the United States as described above, he or she may be subject to extremely high federal and state estate taxes. In contrast, citizens of countries that have an estate tax treaty with the United States are treated the same as U.S. citizens and, as a result, receive an $12.92 million deduction for federal estate taxes. Thus, for nationals of countries covered by the estate tax treaties, no federal estate tax will be due in most cases. However, there is no special deduction for state taxes.

Inheritance Tax Treaty Countries

Currently, the United States has signed estate tax treaties with 17 countries. Japan is one of these countries, so Japanese citizens are treated in the same way as U.S. citizens when they die. The Japan-United States: Transfer Tax Agreement (1954) provides for equal domestic and foreign inheritance taxes for citizens of the signatory countries.

When an inheritance tax treaty is applicable

Whether or not a country has an inheritance tax treaty has a significant impact on whether a foreign national is required to pay estate tax. This is because for persons from countries that are not parties to a treaty with the United States, only $60,000 is deducted from the U.S. estate, whereas U.S. citizens and nationals of tax treaty countries are entitled to an $12.92 million deduction for federal estate tax.

Filing of Federal Estate Tax Returns

When a foreign national without U.S. citizenship or domicile dies leaving an estate in the U.S., a U.S. Federal Estate Tax Return must be filed with the Internal Revenue Service (IRS) within nine months of the date of death. The federal tax return must be filed on Form 706-NA. The U.S. tax filing period can be extended for six months by filing a Form 4768.

Credit for U.S. Estate Tax under the U.S.-Japan Estate Tax Treaty

Article 4 of the U.S.-Japan Inheritance Tax Treaty provides for a provision requiring the U.S. to deduct a certain amount of inheritance tax if the U.S. intends to impose inheritance tax on the estate by reason of the fact that the estate is located in the United States. The purpose of this Article is to ensure equality between U.S. and Japanese nationals with respect to inheritance tax by providing that if a U.S. person is entitled to a credit for inheritance tax, a Japanese person is also entitled to the same credit.

Credit for U.S. Estate Tax under Article 4 of the U.S.-Japan Estate Tax Treaty

Under the Japan-U.S. Inheritance Tax Treaty, the Article provides for the calculation of the amount to be deducted from the amount of inheritance tax as follows:

The amount deductible from the amount of inheritance tax is an amount equal to the percentage of (i) the amount that would be tax deductible against the imposition of inheritance tax by the U.S. if the decedent were a U.S. person (Article 4(a)) and (ii) the value of property located in the U.S. that would be subject to tax by Japan and the U.S. (Article 4(a)) to the value of all property subject to tax by the U.S. if the decedent were a citizen or domiciled in the U.S. (Article 4(b)). This means that, in practice, the deduction to which U.S. persons are entitled because they are taxed only on their U.S. assets is applied to Japanese persons as a percentage of their U.S. assets in relation to their worldwide assets.

U.S. Assets as a Percentage of Worldwide Assets

The amount deducted from the estate tax is determined by (i) x ((ii) / (iii)). In other words, the ratio of U.S. assets to the decedent’s worldwide assets must be calculated. In other words, the calculation will be made by $12.92 million x (the value of the estate’s assets located in the U.S.) / (the value of the estate’s assets located throughout the world). For example, if the property in the U.S. is 100 million yen and the worldwide property (including the property in the U.S.) is 1 billion yen, the amount of tax to be deducted would be $12.92 million x 100 million yen ÷ 1 billion yen = $1.292 million. Since the property in the U.S. is 100 million yen, even if the estate tax were 40% (40 million yen) of the value of the property in the U.S., it would still be less than the tax credit amount of $1.292 million, so the tax payable in the U.S. would be zero.

Federal Estate Tax Returns

In order to obtain the benefits under the U.S.-Japan Estate Tax Treaty as described above, a federal estate tax return must be filed within nine months of the decedent’s death, reporting the decedent’s worldwide estate as well as claiming the deduction under Article 4 of the U.S.-Japan Estate Tax Treaty. If the executor or other person fails to follow this procedure, the huge tax deduction may be denied and the executor may be charged with breach of duty of care. Kuribayashi Sogo Law Office provides assistance with the federal estate tax filing process in the United States. In addition to receiving requests from heirs who are obligated to file estate tax returns, we are often requested by Japanese attorneys who are executors of wills to provide support for filing services.