International Estate Tax: Domicile, Situs, and Expatriation

Key Takeaways

• US citizens are subject to worldwide estate tax at death with a roughly $14 million unified exemption; nonresident aliens are taxed only on US-situs assets with a $60,000 exemption, a stark difference that drives substantial cross-border planning.
• The Section 877A expatriation tax treats covered expatriates as if they sold all worldwide assets at fair market value the day before renouncing citizenship or surrendering a long-term green card, with only an $890,000 gain exclusion (2026 indexed).
• The most dangerous planning mistake for nonresident aliens is buying US real estate in personal name, the $60,000 exemption and 40 percent rate combination can devastate an estate that would otherwise qualify for the much larger domiciliary exemption.
• The Section 2801 tax imposes a flat 40 percent tax on US persons who receive gifts or bequests from covered expatriates, payable by the recipient, family members who expect inheritances from an expatriating relative often discover this rule too late.

What It Is

U.S. estate and gift tax depends on the transferor's status, not the beneficiary's. A U.S. citizen or domiciliary is taxed on worldwide assets at death, with a unified exemption of approximately $13.99 million per person (2025 indexed figure commonly cited for 2026 returns). A nonresident alien is taxed only on U.S.-situs assets, with a $60,000 exemption at death and no lifetime gift exemption (though gifts of intangible property by nonresident aliens are exempt from U.S. gift tax under §2501(a)(2)).

Expatriation tax under §877A applies when a U.S. citizen renounces citizenship or a long-term permanent resident abandons green card status, if the person is a covered expatriate: net worth over $2 million, average U.S. income tax liability over a threshold (approximately $201,000 for 2026, indexed), or failure to certify five years of tax compliance.

The Intuition

The U.S. tax system is famously transferor-based for estate and gift tax and citizenship-based for income tax. A French citizen with a Manhattan apartment and a New York brokerage account is subject to U.S. estate tax on those assets at death, with only a $60,000 exemption, potentially triggering 40 percent tax on the excess. The same French person, if also a U.S. resident, would be taxed on worldwide assets with the much larger domiciliary exemption.

For wealthy individuals moving across borders, the interaction of these rules produces both planning opportunities and traps. Pre-immigration planning is almost entirely about asset acquisition and restructuring before the person becomes a U.S. domiciliary. Pre-expatriation planning is about the §877A mark-to-market event that can trigger substantial tax on unrealized appreciation.

How It Works

Three rulebooks apply in parallel.

Scenario 1: US domiciliary dies
  Worldwide assets taxed at up to 40%
  Unified exemption applies (~$13.99M indexed)
  Foreign estate tax paid is creditable under §2014
  US has estate tax treaties with ~15 countries

Scenario 2: Nonresident alien dies
  Only US-situs assets taxed
  $60,000 exemption
  US real estate, US corporate stock (physically or situs test),
    tangible personal property in US are US-situs
  Bank deposits and most debt instruments are not

Scenario 3: Covered expatriate renounces under §877A
  Deemed sale of worldwide assets at fair market value day before
    expatriation
  $890,000 (2026 indexed) exclusion of net gain
  Tax at ordinary or capital rates depending on asset type
  Deferred comp, specified tax-deferred accounts taxed separately
  §2801 tax on US gifts and bequests received by US persons from
    covered expatriate at flat 40%

Domicile for estate tax is a facts-and-circumstances test: presence in a jurisdiction with intent to remain indefinitely. The income tax definition of U.S. resident (substantial presence test or green card test) is different and can produce income-tax residence without estate-tax domicile, or vice versa.

Treaties matter. The U.S. has estate tax treaties with countries including the U.K., France, Germany, Japan, Canada (no estate tax treaty per se but income tax treaty covers much), and a handful of others. Treaties typically resolve dual-domicile conflicts, allocate situs, and provide credits.

Worked Example

A British citizen lived in the U.S. for 12 years on an H-1B visa and eventually became a green card holder 8 years ago. She now holds $25 million of assets, including $18 million of private company stock (basis $2 million), $5 million of U.S. real estate, and $2 million in a U.K. brokerage. She is considering returning to London permanently.

As a long-term resident (green card 8 of last 15 years), she is subject to §877A on abandoning green card status if she is a covered expatriate. Net worth clearly exceeds $2 million.

Deemed sale gain: $16 million on private stock, $0 on home (if primary), and modest gains on U.K. brokerage. Section 877A exclusion: $890,000. Taxable gain: roughly $15.1 million. At 23.8 percent long-term rate including NIIT, the tax is approximately $3.6 million, due with the final U.S. return.

Post-expatriation, she becomes a nonresident alien for future U.S. tax. Her U.S. real estate still sits in U.S. estate tax exposure with a $60,000 exemption. Wrapping it in a foreign corporation (owned directly or through a foreign trust) converts the situs question from U.S. real estate to foreign corporate stock, typically non-U.S.-situs, eliminating the estate tax exposure at the cost of FIRPTA and corporate-level income tax considerations.

Common Mistakes

1. Acquiring U.S. real estate in personal name as a nonresident. The $60,000 exemption and 40 percent rate combination is punishing. Foreign corporations or irrevocable foreign trusts are standard holding structures, selected based on FIRPTA, rental-income flow-through, and treaty protection.

2. Missing the long-term resident clock. §877A applies to green card holders who held status in 8 of the last 15 tax years. A person who surrenders in year 7 avoids the regime. Careful counting of calendar years matters.

3. Holding PFICs before immigration. Under §1291, unaudited gain accretion on passive foreign investment company shares held pre-immigration is subject to punitive tax. Liquidating or electing QEF/mark-to-market before U.S. residency begins preserves value.

4. Ignoring the §2801 trap. U.S. citizens or residents who receive gifts or bequests from covered expatriates pay a flat 40 percent tax under §2801, payable by the recipient. Family members who expect inheritances from an expatriating relative often discover this rule too late.

5. Forgetting treaty domicile tiebreakers. A wealthy individual with ties to both the U.S. and a treaty partner can be domiciled in both systems simultaneously. Treaty tiebreaker tests (permanent home, center of vital interests, habitual abode, nationality) resolve the conflict but only if the taxpayer claims the treaty position on Form 8833.

Frequently Asked Questions

Q: What is international estate tax planning in simple terms? When you own assets in multiple countries or move between jurisdictions, estate and gift taxes from more than one system can apply to the same wealth. Planning involves identifying which countries can tax which assets, using treaties to avoid double taxation, and structuring ownership to minimize the combined exposure.

Q: How does international estate tax planning affect investment decisions? It makes the choice of holding structure critical for nonresident aliens buying US assets. Holding US real estate directly triggers a $60,000 exemption and 40 percent estate tax; holding it through a foreign corporation can convert the US situs exposure, though at the cost of FIRPTA withholding and additional filings on rental income.

Q: What is a real-world example of the Section 877A expatriation tax? A UK citizen who held a US green card for 8 years holds $25 million of assets including $16 million of appreciated private company stock. When she surrenders her green card, Section 877A deems a sale of all assets. After the $890,000 exclusion, roughly $15.1 million of gain is taxable at 23.8 percent, creating an approximate $3.6 million tax bill due with the final US return.

Q: How can investors reduce exposure to international estate taxes? Pre-immigration planning restructures asset ownership before US residency begins. Pre-expatriation planning manages the Section 877A mark-to-market by timing the exit when asset values are lower or by making elections available for specific assets. Treaty claims, proper domicile documentation, and foreign corporation structures for US real estate each address different pieces of the cross-border puzzle.

Q: How is international estate tax planning different from the foreign tax credit? The foreign tax credit (Form 1116) offsets income tax, dividends, interest, capital gains, paid to foreign governments against US income tax. International estate tax planning addresses transfer taxes, estate, gift, and generation-skipping, paid at death or on lifetime transfers, which are entirely separate tax systems from income tax. Some countries have estate tax treaties with the US, others use only the general Section 2014 credit for foreign death taxes paid.

Sources

1. Cornell Legal Information Institute. "26 U.S. Code Section 877A, Tax responsibilities of expatriation." https://www.law.cornell.edu/uscode/text/26/877A
2. Internal Revenue Service. "Publication 519, U.S. Tax Guide for Aliens." https://www.irs.gov/publications/p519
3. Internal Revenue Service. "Expatriation Tax Guidance." https://www.irs.gov/individuals/international-taxpayers/expatriation-tax
4. Sullivan and Cromwell LLP. "Private Wealth Practice." https://www.sullcrom.com/practices/private-wealth

Disclaimer

This article is educational content only and is not financial advice. Nothing here is a recommendation to buy, sell, or hold any security. Consult a licensed advisor before making investment decisions.