Have you decided it’s time to invest your money in assets in the United States? Did you choose the property you’re interested in yourself or did an external company locate one for you? Are you sure the investment is worthwhile and confidant that this is the right move for your heirs as well? Before you make such a big decision you should stop and take a moment to read about the tax that might cost you up to half of the property’s value, the estate tax.
One of the most significant tax burdens imposed by the United States is the tax levied on the assets of a deceased – the estate tax. This tax is not imposed solely on American citizens, it is also imposed on foreign citizens who hold assets within the United States. The rates of the tax are extremely high and exceptional in scope compared to other countries in the world.
In the article here we will stand on the difference between inheritance tax and estate tax, we will describe the limits of the tax and present a number of coping methods that will allow reducing tax liability as much as possible.
Estate tax and Inheritance tax
These two terms are often used interchangeably, but it is important to understand that these are two different kinds of tax, and each country uses them differently depending on various considerations.
Inheritance tax is a tax levied on the deceased’s heirs and is derived from the values of the assets. This tax is calculated according to the income of the heirs. Thus, each heir is taxed separately depending on his income level.
For the most part, the closer the heir is to the deceased, the smaller the tax rate he will be required to: an inheritance from a grandfather will be taxed differently from an inheritance received from a distant cousin. When it comes to inheritance tax, the burden may be smaller and adapted to the heir’s abilities, from the state’s perspective, this tax that yields fewer profits.
An estate tax is a tax that applies to the value of the assets of a deceased when his heirs seek to receive the value of the asset or the asset itself. The tax is levied on the assets, not on the heirs.
For the heirs, the tax burden is smaller but from the state’s point of view, because the tax does not take into account the income of the heirs, the share collected in the framework of this tax is greater.
The United States has chosen to take the path of taxing the assets of a deceased person, i.e. an estate tax.
U.S. estate tax
The U.S. estate tax has always been known for its unusual rates, but the country’s 2018 tax reform has made matters worse.
As far as American citizens are asked, the situation is relatively good – any estate worth up to $11 million is exempt from the tax. The estate of a U.S. citizen who is not exempt is taxable at a rate of 40%.
As for the estates of foreign investors, only estates under $60,000 are tax-free, and the rest are taxable at a draconian rate of 35%.
The following table compares American citizens and foreign citizens:
| American citizens | Foreign citizens | |
| The amount of the exemption | $11 million | $60,000 |
| The tax rate | 40% derived from any amount over $11 million | 35% will be derived from any amount over $60,000 |
What does an estate tax mean for Israeli citizens?
As mentioned above, since the estate tax is applied not to the heir but any property located within the United States, Israeli citizens investing in the United States are also exposed to its applicability. (read more here about the Connection between U.S. Tax Authority and Israeli Bank Accounts).
In addition, this tax does not apply solely to real estate; but also applies to securities, bonds, insurance, cash, and personal belongings located within the United States. This is because the U.S. Tax Authority identifies these items as assets that are located within the state.
Therefore, for many Israelis who hold real estate or other assets such as securities and bonds in the United States, the applicability of the tax is very significant. In the absence of rigorous tax plans, they are exposed to an estate tax that will be levied on the total value of their assets in the United States – a tax that will cost them nearly half the value of their assets.
How do I minimize such tax liability?
By investing directly using a partnership, a limited collateral company, or a local corporation you will be exposed to the applicability of the estate tax since your assets will still be considered within the boundaries of the United States. Investing through a foreign company will exempt you from the estate tax but may expose you to high rates of tax applied to foreign companies.
In other cases, exposure can be dealt with by investing through trusts or life insurance, but the costs of these might also be high.
The only way to avoid huge exposure to the applicability of the tax is professional tax planning by experts in the field who will find the most suitable way for you to reduce tax liabilities. The skilled Team of MasAmerica is at your disposal for any questions and will be happy to help you reach possible solutions that suit your needs.
