Potential Federal Estate Tax (FET) on US-based assets is critical for for us all to be aware of, and is often unknown. If you have more than $60k worth of assets domiciled in the USA, could this be a lurking menace in your wealth??

I wrote about FET 2 years ago in Blog 203. The potential issue has not gone away, and the level of awareness does not seem to have increased. Hence, I’m making a renewed plea to try do so!

In a recent Irish Times article, they looked at the top US companies based in Ireland, and the top 5 were:

• Apple. Employ about 6,000 people here.
• Google. c5-6,000 employees here.
• Microsoft Ireland Operations. c3,500 employees here.
• Facebook parent Meta. c2,500 employee here.
• Dell. c1,500 reported employees
• And we haven’t touched on all the large pharma tech/companies such as MSD and Pfizer, and their talented workforce

The point is, there are a huge number of people here in Ireland, c20,000 in the top 5 US companies alone, who are receiving US stock options and who therefore own US assets. This one is for them!

What is Federal Estate Tax (FET)

Say I own €500k of Ryanair shares, and I die, my darling wife will receive the value of these totally tax free. Spouses pay no tax in Ireland on transfer of assets on death. However, they may be liable to tax from another country if some of those assets were based/domiciled in that other country at the time of death.

However, in the case of non-US citizens, which is most of us and most of our estates, the US Government charges FET on US located assets (US situs assets), once the value of the US assets in the estate exceeds $60,000. Thereafter, rates of up to 40% apply.

So, if I own €500k of Apple shares, and I die, my darling wife will receive the value of these, minus an extremely large chunk of tax. No Irish tax is payable of course. However, the US FET rate on that level of assets is c31% on the total amount of stock. The net result is an FET bill of c$155,000. Almost a third of that asset is gone overnight in avoidable taxation. Worrying thing is that most people are not aware, or don’t believe this exists.

If my darling wife then continues to retain these US assets, and she subsequently leaves them in her estate to our children, the stock may again be subject to US FET (and also to Irish inheritance tax if the kids have exceeded their inheritance limits here!). There could be an erosion of up to 70% of the asset value when passing to loved ones. It insane level of tax on an asset.

I believe that if and when a US FET liability arises, the executor will be responsible to settle any amount due, so it is important for them to be aware of their obligations in such cases! Given there is now a very high volume of sharing between countries (such as Ireland and USA) under the Foreign Account Tax Compliance Act (FATCA) and W-8 reporting, there is a greater likelihood that the IRS will be able to accurately identify the owner of a US asset, and seek their pound of flesh. The lurking menace that is potential FET bills.

What Type Of Assets?

According to Revenue, the below confirms the ‘class’ of property, and the location or ‘situs’ for tax purposes.

Interestingly, for share class of assets, the location is deemed to be ‘Place where or under the law of which the corporation was created’. CRH was an Irish company and created (and listed) here for many years – but is has now ‘moved’ and is listed on the New York Stock Exchange (NYSE). Some say that it is still, by the definition below, ‘situs’ in Ireland – but one would want to be very clear that that is the case before holding onto a large chunk till death!?

And for anyone with a yacht (:0) or airplane, note that tax treatment will be based on where it is ‘registered’ – you’ve been warned!

And if you invest in funds, if they are Irish domiciled, this is not an issue, even if the fund holds large chunk of US stock/equity. Irish domiciled is ‘situs’ in Ireland.

How To Navigate FET in Ireland?

While there is no silver bullet, there are mechanism and approaches that can be considered to help. Again, it is all highly individual and technical, so seek professional tax help from a firm that specialises in this type of project. 4 Approaches worth exploring:

1) Ireland and US Tax Treaty

There is an Irish–US tax treaty that can offer credit relief so that Irish inheritance tax (paid by kids not spouses of course) can be eliminated by the US FET paid when they are the beneficiaries! It may work out very well in some cases, to deal with FET.

The double taxation agreement provides that Ireland will grant Inheritance Tax credit relief for FET paid as the property is US-based (situs). As inheritance tax is not paid by the spouse in Ireland, but they are subject to FET, why would one pass any substantial US-based assets to their spouse if they had an alternate option.

Ultimately, our understanding is that it can be a major financial error to leave a large value of US-based stock to your spouse. If you insist on retaining RSUs you get through work, or US-based stock or property until your death, it may be more beneficial to explore ‘willing’ them directly to your children on your death (if you have kids), and skipping your spouse entirely. Get some specialist tax guidance to help figure this out.

2) Revocable Living Trusts?

Revocable Living Trusts (RLTs) are a common feature in estate planning in the United States. Check out this interesting Texas Law page which outlines that property passed through a Trust skips probate, while assets passed via a Will must go through probate! When considering these trusts in the context of Irish tax law, it is crucial to get someone (a tax specialist) who knows what they are doing! In many cases, US revocable living trusts are viewed as transparent for Irish tax purposes during the settlor’s/your lifetime, provided the you have the legal capacity to manage the trust.

3) Investing Through Different Structures

Another way to potentially mitigate exposure to US Federal Estate Tax is by ensuring you are not deemed to directly own US assets. This can be achieved by investing through alternative structures, such as certain corporate entities, partnerships, or trusts, as above. Using these structures can provide a degree of separation between you and the assets, which may help to legally avoid US FET liabilities. And as mentioned above, you can get exposure to US assets while investing in Irish domiciled funds. It’s probably the easiest work-around for most people, depending on the situation.

4) Use Sole Rather Than Joint Accounts

Joint accounts require careful consideration, particularly when it comes to US assets. Upon the death of one account holder, assets in a joint account typically transfer to the surviving holder. If US assets are involved, the entire value of those assets could potentially be subject to US Federal Estate Tax in the estate of the first deceased. To avoid this, it may be more advantageous to hold US assets in individual names rather than jointly. By doing so, the account holder retains flexibility in their will to specify who should inherit those assets, thereby providing greater control over the distribution and potentially reducing tax exposure. In addition, it may enable the use of the $60k threshold twice?

Conclusion – Federal Estate Tax in Ireland

Most of us are very fond of America. We have a connection and an affinity to parts of it and its culture. We also love investing in it, and benefitting from it’s significant growth in equity values over the decades. We also want to ensure we avoid any lurking menace in the process. While we’ll most likely have shuffled off this mortal coil before anyone has paid the potentially punitive tax, it’s nice to know that we have done what we can to help avoid any such nastiness!

I hope it helps.

Paddy Delaney QFA RPA APA

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