German-US Tax Treaty & International Estate Planning
ESTATE TAX PLANNING FOR GERMAN NON-RESIDENT ALIENS
KJMLAW Partners has for more than 20 years worked with accountants, wealth advisors, and attorneys in Germany on behalf of German clients with assets in the United States.
TAXATION OF NON-RESIDENT ALIENS UNDER U.S. LAW
Germany is one of sixteen countries that has negotiated an estate and gift tax treaty with the United States. The two countries first signed such an agreement in 1990 and amended it in 1998.
Where it applies, the Germany-U.S. Estate and Gift Tax Treaty tends to reduce the tax liabilities of German nationals, compared with citizens of the majority of countries which have not entered into estate and gift tax treaties with the U.S. This is because the U.S. heavily taxes property in the United States owned by non-resident aliens. Specifically, at the time of their death, a non-resident alien from a country that is not subject to a tax treaty qualifies for a $60,000 exemption from U.S. estate taxes and is taxed at a marginal rate of 40%. Thus, for example, if a non-resident alien owns $1 million in U.S. property, they would at their death be subject to an estate tax of $376,000 (40% of $940,000).
EFFECTS OF THE GERMANY-U.S. ESTATE AND GIFT TAX TREATY
The Germany-U.S. Estate and Gift Tax Treaty provides a number of significant advantages to German non-resident aliens who own qualifying U.S. property. First, the treaty identifies certain categories of property that are subject to U.S. estate taxes. Thus, for example, a German non-resident alien who owns real property located in the U.S. (or a partnership interest in such real property) is subject to estate taxes as provided for in the treaty. By contrast, the treaty provides that owning shares of a U.S. corporation, including one that owns U.S. real property, is not subject to U.S. estate taxes. Likewise, under the treaty holdings of cash, most tangible personal property, and most intangible property (such as intellectual property) are not subject to U.S. estate taxes.
The treaty also imposes lower estate tax rates on German non-resident aliens compared to those imposed on non-resident aliens from countries without such treaties. Specifically, the treaty provides German non-resident aliens with a pro-rata tax exemption. The amount of the tax exemption depends on how much qualifying property the German non-resident alien owns in the U.S. compared to their worldwide holdings. With a higher percentage of holdings represented by qualifying U.S. property, the German non-resident alien receives a higher estate tax exemption. In 2020, the maximum U.S. estate tax exemption per individual is $11.58 million. Under the provisions of the Germany-U.S. treaty, a German national who owns U.S. real estate worth $1 million and total worldwide property worth $10 million would be entitled to an estate tax exemption in excess of $1.1 million. Thus, in this example, their $1 million real estate holding in the U.S. would not be subject to U.S. estate tax.
The example set forth above is simple in that it involves a single individual as opposed to a married couple. The Germany-U.S. treaty includes specific provisions regarding the calculation of tax exemptions for married couples. Likewise, the treaty includes rules regarding limits on lifetime gifts and the treatment of certain kinds of dents used to secure the purchase of qualifying U.S. property.
As shown above, the Germany-U.S. treaty can provide considerable tax advantages to German non-resident aliens. But, as with any aspect of estate and gift tax planning, there are many specific considerations to be taken into account when advising particular clients.
ESTATE AND GIFT TAX PLANNING
If you are a German resident looking to purchase property in the U.S. (or if you are advising a German non-resident alien), effective tax planning and structuring are best handled at or before the time the U.S. property is purchased. This begins with a full understanding of the asset and its underlying purpose. There are a number of questions to address at the beginning of this process. Will this investment be given to a U.S. or foreign beneficiary? Is it a personal purchase? Is the purpose to generate income? Are you planning to donate partial proceeds?
HOW WE CAN HELP
We stand ready to assist German residents and their financial and legal advisors in connection with any aspect of their holdings and interests in the United States. Kevin J. Moore is conversant in German and can be reached using the contact information below.
Phone: 01 (626) 568-9300