Form 706-NA Explained: Key Considerations and Requirements for Nonresident Alien Estate Tax Filings
Posted on 07-06-2023 12:18 PM
Today, we're sitting down with my good friend and USA tax expert in Singapore, Portugal, Dubai and Internationally Derren Joseph from HTJ.tax. And the topic of our discussion is Form 706-NA AKA Form 706NA which has comprehensive coverage here in this article.
For nonresident alien deaths, their estate must submit Form 706-NA and determine whether any assets located in the U.S. qualify as treaty-exempt assets to avoid estate tax liability.
Unfortunately, nonresident domiciliaries' estate tax exemption amounts are quite limited - only $60,000. Therefore, filing a 706-NA return becomes almost inevitable for many families.
The Decedent’s U.S.-Situs Assets
For estate tax purposes, executors of deceased estates must account for all property he owned or had interests in at the time of his death, including tangible and intangible assets such as cash and securities, real estate, life insurance policies and trusts. This list is known as their "gross estate". When making their valuation determination it is essential that fair market value as of date of decedent death be taken into consideration instead of original costs or values at time of acquisition.
As part of its estate and generation-skipping transfer taxes filing requirements, an estate must also disclose a total value for all assets located within the U.S. ("U.S. situs") as well as outside (see Instructions to Form 706). These two totals will help calculate tax payments owed from both these sources.
Funeral and administration expenses, claims against the estate, unpaid mortgages or liens and charitable contributions may all reduce a decedent's taxable estate, starting with gifts made before 1977. The value of lifetime taxable gifts made may also contribute to its decrease.
Keep in mind that the estate of a nonresident alien is subject to different rules than that of a U.S. citizen or resident. A person could be considered resident for estate and gift tax purposes under the subjective domicile test while being classified as nonresident for income tax purposes based on more stringent "substantial presence" criteria.
As part of the calculation for an estate's assets, it is also crucial that its executor take into account whether there is an estate tax treaty between the United States and the decedent's country that allows less burdensome estate tax rules for family members of deceased. If applicable treaties exist, Schedule A of Form 706 allows executors to claim benefits of these treaties when filing returns; having copies on hand can make this task simpler.
The Decedent’s Will
As soon as a person passes, their assets become part of their estate, including money, real estate and "tangible personal property". After death has taken place, this amount must then be reported to the IRS using Form 706, known as a federal estate tax return form. In order to complete it accurately and report its total value correctly. For this form 706 return to be submitted properly by its executor it requires detailed information about each asset owned by decedent such as its date of death valuation, fair market value as of death and any deductions available when filing this return.
As part of calculating the total value of an estate, it is essential that any debts the decedent owed be included as well as any property they gave away prior to death as it will only be taxed by the IRS if taxable estates exist.
If the decedent was married, their executor must determine if any property eligible for marital deduction. This can be determined either through consulting their will or writing a letter of explanation explaining this circumstance.
The marital deduction allows executors of deceased nonresident alien estates who leave assets to their surviving spouse to reduce federal estate tax by the amount passed on to their surviving spouse, up to $64,000; it only applies if all requirements of Internal Revenue Code Section 2056 (covering bequests to surviving spouse) have been fulfilled.
Executors must also consider whether any property in their gross estate may qualify for tax deductions under international treaties and conventions, like those established by the US, to eliminate double taxation of properties. It is essential for executors and executors alike to be acquainted with these treaties and conventions, which can provide valuable tax deductions under these treaties and conventions. For more information please refer to Form 706-NA Instructions or IRS website regarding estate tax treaties and conventions.
The Decedent’s Stocks
Executors of nonresident alien estates must consider the value of any stocks and bonds owned by the decedent, whether located domestically or overseas. Furthermore, ownership by foreign corporations treated as real and personal property by U.S. estate taxes; this includes direct voting securities registered within the US as well as shares registered here; any derivatives from such securities must also be taken into account by executors.
Due to various considerations, it is necessary to determine the gross estate's value before considering individual asset values. To do this, estate values are calculated by adding together all of a decedent's fair market values and then dividing this total among beneficiaries according to their shares of this total estate - usually about one third in most noncommunity property states.
Calculating the value of an estate requires that its executor include all U.S. assets owned by their decedent, even those exempt from U.S. estate tax thanks to treaties. In order to do this, all of their assets should be listed and assigned a fair market value; any items exempted by treaty should remain blank until returned claiming its benefits as necessary.
Final Step: Executor must keep accurate records of the estate assets, especially since any discrepancies could incur fines or penalties. To avoid these problems, personal representatives should obtain copies of valuation dates from all financial institutions that held assets no later than death of decedent.
The Decedent’s Debts
When handling the estate of a nonresident alien, several considerations need to be made. First and foremost is their debt load; especially if they were known for splurging during life. Large debt loads could push past the $60,000 filing threshold. Asset allocation also needs to be taken into account.
Nonresident aliens' taxable estate consists of the tangible and intangible assets located in the United States (known as "U.S. situs assets"). This could include real estate, shares in U.S. corporations, debt obligations owed by decedent, interests in U.S. partnerships (determined case-by-case), etc. However, unlike that of citizens or residents, their estate can be reduced further through an unlimited marital deduction.
Nonresident aliens' taxable estate can also be reduced through use of their foreign tax credit. This credit can be applied towards offsetting any tax liabilities from transfers within the US as well as those when estates transfer assets abroad.
When dealing with nonresident alien estates that are subject to tax, their executor must submit Form 706-NA: United States Estate (and Generation-Skipping Transfer) Tax Return for Nonresident Alien EstatesPDF within nine months after death along with payment for any applicable taxes due.
Estates must pay both estate tax and GSTT through separate checks made payable to "United States Treasury." If your client's estate cannot submit required paperwork and payments on time, filing Form 4768 allows for an extension.
Note that the IRS maintains treaties and conventions with various countries to avoid double taxation, and you should always attempt to take advantage of them to your client's benefit. If a treaty cannot be utilized, explain why in your 706-NA filing; it's unlikely to be examined closely by the IRS.