Using U.S.-Foreign Tax Treaties to Reduce Estate and Inheritance Tax Exposure
The double taxation problem in cross-border estates
When a person dies with assets in multiple countries, or when a decedent and their beneficiaries are subject to the laws of different jurisdictions, the same assets can face estate or inheritance tax in more than one country simultaneously. Without relief, the combined tax burden can be devastating — particularly for families with real estate, business interests, or financial accounts spread across borders. U.S. estate and gift tax treaties address this problem for a limited but significant set of countries.
Which countries have estate and gift tax treaties with the United States?
The United States has estate and gift tax treaties — separate from income tax treaties — with a relatively small number of countries. As of the current date, these include Australia, Austria, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, Norway, South Africa, Sweden, Switzerland, and the United Kingdom. Each treaty is unique; the provisions governing exemptions, situs rules, credits, and marital deductions vary from treaty to treaty and must be analyzed individually.
Notably absent from the U.S. estate tax treaty network are Canada, China, India, Israel, Mexico, Brazil, and most of Latin America, the Middle East, and Southeast Asia. Families with connections to these countries must rely on domestic law provisions — primarily the foreign death tax credit under Section 2014 of the Internal Revenue Code — rather than treaty benefits to mitigate double taxation.
What estate tax treaties typically provide
While treaty provisions vary, most U.S. estate tax treaties address several common issues. First, they establish rules for determining where assets are "situated" for estate tax purposes — resolving conflicts when two countries would both claim an asset as locally situs. Second, they provide credits or exemptions to prevent the same asset from being taxed twice. Third, many treaties extend the U.S. estate tax exemption to non-domiciliary nationals of the treaty partner — giving a French citizen who owns U.S. assets a much larger exemption than the standard $60,000 available to non-resident aliens from non-treaty countries. Fourth, some treaties provide an unlimited marital deduction for transfers to a surviving spouse who is a citizen of the treaty partner country.
The U.S.-UK estate tax treaty: a practical example
The U.S.-UK Estate Tax Treaty is one of the most frequently invoked. Under the treaty, a UK domiciliary who owns U.S. assets is entitled to a pro-rata share of the U.S. estate tax exemption based on the proportion of their worldwide estate represented by U.S. assets — rather than being limited to the $60,000 default exemption. For a UK resident with a worldwide estate of $10 million, half of which is in U.S. assets, the treaty can effectively provide a $6.8 million U.S. exemption rather than $60,000. The difference in tax exposure is enormous.
Treaty benefits are not automatic
Claiming treaty benefits requires affirmative action. Treaty positions must be disclosed on the estate tax return, and in many cases a specific election or claim must be filed to invoke treaty provisions. Failing to raise treaty benefits at the time of filing can result in forfeiting them, as the statute of limitations may close before the issue can be corrected. Families with potential treaty claims should ensure their estate planning attorneys and estate administrators are fully aware of the applicable treaty and its procedural requirements.
If your family has assets or members in multiple countries, U.S. estate tax treaty analysis should be a central part of your planning. Our international private client attorneys work with cross-border families to identify treaty benefits, structure holdings appropriately, and minimize the risk of double taxation. Contact us to discuss your situation.
