Ultimate Guide to Cross-Border Estate Tax Planning

Cross-border estate tax planning helps individuals manage taxes and legal challenges when their assets or family span multiple countries. Without proper planning, you risk double taxation, conflicting laws, and compliance issues. Key considerations include understanding domicile, property location (situs), and tax treaties. Fractional property ownership, like through Lofty, adds complexity, as U.S.-situs assets exceeding $60,000 for non-residents may face up to 40% estate tax. Strategies like gifting, trusts, and leveraging international tax treaties can reduce liabilities. Early action and professional advice are essential to protect your wealth and simplify inheritance processes.

Estate Tax Implications For Non-US Residents With Real Estate

Key Concepts: Jurisdiction, Domicile, and Situs

Cross-border estate taxation revolves around three essential ideas: jurisdiction, domicile, and situs.

Domicile, Residency, and Nationality

Your domicile is your legal permanent home - it’s not just about where you live right now. It’s the place where you plan to stay indefinitely, the center of your personal and financial life. Unlike residency, which can change based on where you spend your time, domicile reflects your long-term intentions.

This distinction plays a big role in tax obligations. For example, U.S. citizens and domiciliaries are subject to U.S. estate tax on their worldwide assets, while non-U.S. persons are taxed only on assets located within the United States. To establish domicile, you need both a physical presence and the intention to stay. Courts look at factors like where you vote, hold a driver’s license, own property, and keep your bank accounts to determine your true intent.

Court rulings, such as Morgan v Cilento, emphasize that moving assets and making a long-term commitment to a specific location are key in determining domicile.

Aspect	Domicile	Residence
Definition	The country a person considers their permanent home, with strong personal and financial ties	The place where someone lives for a significant amount of time
Permanence and Intention	Requires intent to live there permanently	Based on physical presence, without needing permanent intent
Multiplicity	Only one domicile at a time, and it’s harder to change	Multiple residences are possible and easier to alter
Taxation	Impacts estate and inheritance taxes	Affects income tax and capital gains on global assets

Knowing your domicile is just one piece of the puzzle. You also need to understand where your property is legally located, or its situs, to grasp your tax responsibilities fully.

How Property Location Affects Taxation

The situs of your property - its physical or legal location - determines which country can tax it after your death. This is especially relevant for fractional property owners, as your investments might span multiple locations. For instance, U.S. real estate always has U.S. situs, no matter who owns it. So, if you’re a nonresident non-domiciliary (NRND) individual with fractional U.S. property interests through Lofty, U.S. estate tax applies when you pass away.

The tax burden for non-U.S. persons can be steep. While U.S. citizens and domiciliaries enjoy a $13.99 million estate tax exemption in 2025, NRNDs only get a $60,000 exemption, which isn’t adjusted for inflation. Any U.S.-situs assets exceeding this small threshold can be taxed at rates up to 40%. However, strategies like holding real estate through foreign corporations, partnerships, or trusts can help reduce or even avoid this liability.

Common Scenarios for U.S. and International Investors

Scenario 1: U.S. Citizen Living Abroad
Sarah, a U.S. citizen working in London, owns fractional rental property interests in Texas and Florida through Lofty. Even though she lives in the UK, her U.S. citizenship means her worldwide assets are subject to U.S. estate tax.

Scenario 2: Non-U.S. Investor in American Real Estate
Carlos, a Mexican national, has invested $200,000 in fractional U.S. properties. Upon his death, his estate would face U.S. estate tax on the full amount. With only a $60,000 NRND exemption available, the remaining $140,000 could be taxed at rates up to 40%, potentially leaving $56,000 in taxes.

Scenario 3: Dual Citizen Complexity
Maria, a dual citizen of the U.S. and Canada, owns fractional properties in both countries. As a U.S. person, her worldwide estate is subject to U.S. taxation. However, the U.S.-Canada estate tax treaty may help prevent double taxation on her Canadian assets.

The Charania Estate v. Commissioner case highlights these principles further. In this case, the U.S. Tax Court ruled that a nonresident alien with stock in a U.S. corporation was subject to U.S. estate tax on that U.S.-situs property, including corporate stock holdings.

For fractional property owners, understanding these concepts is critical. It helps protect your wealth and ensures that your heirs receive what you’ve worked to leave behind.

Using International Estate and Gift Tax Treaties

International tax treaties play a key role in addressing the complications of cross-border estate and gift taxation. They are designed to prevent double taxation on assets located in different countries and to ease tax burdens for those owning fractional property abroad. These agreements establish clear rules for taxation, offering much-needed relief for property owners. Here's a closer look at how these treaties are structured and classified.

Overview of U.S. Tax Treaties

The United States currently has estate and gift tax treaties with 17 countries worldwide. These treaties fall into two main categories:

• Situs-type treaties: Tax assets based on their physical location.
• Domicile-type treaties: Tax assets based on the owner's fiscal residence.

Here’s a breakdown of treaty types for several countries:

Country	Type of Treaty
Australia	Situs
Austria	Domicile
Denmark	Domicile
Finland	Situs
France	Domicile
Germany	Domicile
Greece	Situs
Ireland	Situs
Italy	Situs
Japan	Situs
Netherlands	Domicile
Norway	Situs
South Africa	Situs
Switzerland	Situs
United Kingdom	Domicile

Although the U.S. and Canada ended their estate tax treaty in 1985, double taxation issues were later addressed through amendments to their income tax treaty in 1995. For those owning fractional property, these treaties can increase the exemption amount significantly beyond the standard $60,000 offered to non-U.S. domiciliaries.

How Treaties Prevent Double Taxation

Tax treaties use two main methods to eliminate double taxation:

• Exemption method: One country excludes income or assets already taxed in another country.
• Credit method: Taxes paid in one country are applied as a credit against tax owed in another.

For estate taxes, the country where the deceased was a resident typically has the primary right to tax. Gift taxes, on the other hand, are determined either by the donor's residence or the asset's location.

For instance, if you're a German citizen living in Germany and own fractional U.S. real estate through Lofty, the U.S.-Germany estate tax treaty (a domicile-type treaty) would designate Germany as your primary fiscal residence. Germany would have the main authority to tax your worldwide estate, while the U.S. would implement measures to prevent double taxation on your American assets.

Filing Requirements to Claim Treaty Benefits

To take advantage of treaty benefits, proper documentation and timely filing are essential. If you plan to use treaty provisions to alter how assets are taxed under U.S. law, you must:

• File a detailed statement or Form 8833 (Treaty-Based Return Position Disclosure) with your tax return.
• For non-resident estates filing Form 706-NA, include a statement identifying the applicable treaty, a calculation of any pro-rata unified credit, and supporting documents like foreign tax returns or an inventory of the decedent's assets.

To claim foreign tax credits, complete Schedule P of Form 706 and attach Form 706-CE (Certificate of Payment of Foreign Death Tax). If the foreign government doesn’t certify Form 706-CE, submit it directly to the IRS with an explanation, a copy of the foreign death tax return, and proof of tax payment. Special documentation may also be required for estates of Canadian residents or U.K. citizens.

Accurate and timely submission of forms like Form 8833, Schedule P, and Form 706-CE is crucial to fully benefit from treaty provisions and avoid unnecessary tax liabilities.

These treaties, some of which date back to the first U.S.-Germany double tax treaty signed in 1928, serve as vital tools for navigating the complexities of international taxation. They reflect decades of collaboration to protect individuals from the challenges of cross-border tax obligations.

Structuring Assets with Trusts

Trusts play a crucial role in cross-border estate planning, offering fractional property owners effective ways to manage taxes and safeguard their assets. When set up correctly, trusts can reduce taxable estates while offering specific advantages for international investments.

Why Trusts Work for Cross-Border Estates

Trusts create a legal separation between you and your assets while allowing you to retain control over their management and distribution. This separation can help reduce estate tax exposure by removing certain assets from your taxable estate during your lifetime.

For fractional property owners, trusts provide an added layer of protection across different jurisdictions. For example, holding Lofty fractional real estate in a trust shields these assets from potential creditor claims or legal disputes across borders. In this arrangement, the trust - not you directly - becomes the legal owner of your fractional property interests.

Trusts also simplify succession planning. Instead of navigating probate courts in every country where you hold property, the trust continues to operate seamlessly after your passing. Beneficiaries can receive distributions according to your instructions, avoiding the delays and costs of international probate proceedings.

Tax planning is another key advantage. Depending on how the trust is structured and where it’s based, you can control the timing of income recognition and distribution. This can help spread tax liabilities over multiple years or take advantage of beneficiaries’ lower tax brackets.

Now, let’s look at the differences between U.S.-based and foreign trusts and how they impact tax obligations and compliance.

U.S.-Based Trusts vs. Foreign Trusts

The decision to use a U.S.-based or foreign trust has major implications for taxes and compliance, especially for fractional property owners with international holdings.

U.S. trusts must meet two criteria to maintain domestic status: the "court test" and the "control test". The court test ensures that a U.S. court has primary supervision over the trust’s administration, while the control test requires that U.S. persons control all significant decisions of the trust.

U.S. trusts offer legal clarity and predictable tax treatment. For fractional property owners, income generated from investments flows through the trust with straightforward tax consequences, making compliance more manageable.

Foreign trusts, on the other hand, operate under entirely different rules. If a trust fails the court or control test, it’s classified as a foreign trust for U.S. tax purposes. These trusts fall into two categories: grantor trusts and non-grantor trusts, each with unique tax implications.

• Foreign grantor trusts: Here, the foreign grantor bears the tax responsibility, not U.S. beneficiaries. This means beneficiaries generally don’t face U.S. federal income taxes on distributions. However, if a U.S. person transfers property to a foreign trust with U.S. beneficiaries, the trust automatically becomes a grantor trust, regardless of other factors.
• Foreign non-grantor trusts: These trusts are treated as separate taxpayers under U.S. federal tax law. U.S. beneficiaries may encounter "throwback tax" rules, which can result in high tax rates and interest charges on accumulated income. This can significantly reduce the advantages of using offshore trusts.

Trust Type	Tax Responsibility	U.S. Beneficiary Impact	Compliance Complexity
U.S. Trust	Trust or beneficiaries	Standard income tax rules	Moderate
Foreign Grantor Trust	Foreign grantor	Minimal tax consequences	High reporting requirements
Foreign Non-Grantor Trust	Trust as separate taxpayer	Potential throwback taxes	Very high

Foreign trusts also come with strict reporting requirements, such as filing Forms 3520 and 3520-A, adding to the administrative burden. The complexity increases further when dealing with controlled foreign corporations, which can create unexpected tax consequences for U.S. beneficiaries.

With the basics of trust types covered, let’s explore practical steps for setting up and funding a trust.

Tips for Setting Up and Funding Trusts

Creating a successful trust requires clear goals and expert advice. Every decision you make during the setup process will influence your tax liabilities and asset protection in the future.

• Define your goals: Determine whether your primary focus is asset protection, tax reduction, or wealth transfer. For fractional property owners, common objectives include minimizing estate taxes on international holdings, shielding assets from creditors, and simplifying inheritance processes across borders.
• Select the right trust structure: Different trusts serve different purposes. For instance, revocable trusts offer flexibility but limited tax benefits, while irrevocable trusts provide stronger protection and tax advantages but reduce your control. Discretionary trusts allow for flexible distributions, whereas fixed trusts guarantee specific distributions to beneficiaries.
• Choose the right jurisdiction: Look for jurisdictions with strong asset protection laws, political stability, and favorable U.S. tax treaties. Each location has unique rules regarding asset transfers, inheritance taxes, and probate procedures.
• Pick a qualified trustee: Your trustee should be well-versed in legal and financial responsibilities and ideally based in the trust’s jurisdiction. For cross-border trusts, consider trustees with expertise in international tax compliance and multi-jurisdictional asset management.
• Properly fund the trust: Transferring assets into a trust requires careful planning. For fractional property investments, this includes valuing the assets accurately and documenting the transfers to support any gift tax positions. For Lofty fractional real estate, ensure all ownership percentages and related income streams are well-documented.
• Organize your assets: Before forming a trust, compile a detailed inventory of all your assets, including legal documents, bank accounts, and real estate. Fractional property owners should also document all platform investments.
• Work with professionals: International trusts are complex, so seek guidance from estate planning experts familiar with U.S. and foreign tax laws.
• Maintain thorough records: Detailed documentation is essential for compliance, especially during tax audits or when claiming treaty benefits.

For added efficiency, some individuals implement multiple "situs" wills, where each will governs the distribution of assets in a specific country. This approach can streamline probate and reduce legal conflicts across jurisdictions.

Keep in mind that standard U.S. estate planning methods often fall short in cross-border situations, leading to unintended outcomes. Regularly reviewing your trust becomes even more critical if you move overseas or between countries, as changing circumstances can significantly affect its effectiveness.

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Strategies to Minimize Cross-Border Estate Tax Liabilities

Minimizing cross-border estate taxes requires a thoughtful mix of international agreements, well-timed actions, and diversified investments. Here’s a closer look at some practical strategies to help reduce tax burdens while maintaining investment flexibility.

Using Tax Treaties and Credits

Tax treaties are a key tool for avoiding double taxation when multiple countries claim tax rights over your estate. The U.S. has estate and gift tax treaties with 14 countries, as well as an income tax treaty with Canada that includes estate tax provisions. These treaties define how taxing rights are shared and offer mechanisms like enhanced exemptions or credits for taxes paid to another treaty country. Generally, treaties follow one of two models:

• Situs-Based Treaties: These treaties, often signed before 1966, allocate taxing rights based on where assets are located. Countries like Australia, Japan, and Switzerland follow this model.
• Domicile-Based Treaties: Signed after 1966, these treaties focus on the taxpayer's domicile at the time of death. Examples include agreements with France, Germany, and the United Kingdom.

For non-resident, non-citizens of the U.S., the standard exemption for U.S.-situs assets is only $60,000, with tax rates reaching up to 40%. However, many treaties provide enhanced or prorated exemptions based on the ratio of U.S.-situs assets to worldwide assets. They may also allow for deductions or credits for taxes paid in another country.

Compliance Tip: To take advantage of treaty benefits, you must disclose worldwide asset values on the U.S. estate tax return and file Form 8833 (Treaty-Based Return Position Disclosure). Note that U.S. citizens and domiciliaries generally cannot use these treaties for tax relief due to a "savings clause" in most agreements.

Treaty Type	Focus	Example Countries	Key Advantage
Situs-Based	Asset location	Australia, Japan, Switzerland	Allocates tax rights based on asset location
Domicile-Based	Taxpayer's domicile	France, Germany, United Kingdom	May provide enhanced exemptions for non-domiciliaries

Gifting Strategies That Work

Gifting during your lifetime can significantly reduce your estate's taxable value. By using annual exclusions and transferring fractional interests, you can lower estate taxes while efficiently passing on wealth. This approach is particularly helpful for locking in current exemption levels, which may change in the future.

For international investors, cross-border gifting adds complexity. Different countries have varying rules about when a gift is considered complete, potentially triggering tax consequences in one jurisdiction but not another. Valuation discounts on fractional interests can further reduce the taxable value of gifts. Timing is also critical - transferring assets before they appreciate can ensure that future growth occurs outside the taxable estate.

Diversifying Asset Locations and Structures

Diversification is another powerful way to manage estate tax exposure, especially for fractional property investors. By spreading investments across different countries and legal structures, you can take advantage of varying tax treatments and exemptions. For example:

• Geographic Diversification: Holding assets in countries with favorable estate tax treaties can reduce your overall tax burden.
• Structural Diversification: Using trusts, limited liability companies, or other legal entities can provide tax advantages and protect assets.
• Currency Diversification: Holding assets in multiple currencies can act as a hedge against exchange rate fluctuations.

Fractional ownership naturally supports diversification by allowing you to invest in multiple properties across various locations. This reduces the tax impact of any single asset while maintaining exposure to a broad real estate portfolio.

Liquidity is another critical factor. Traditional real estate investments can make it challenging to meet estate tax obligations without selling entire properties. Fractional ownership, on the other hand, offers more flexibility, as fractional interests can often be sold more easily. This can help you meet tax obligations without resorting to forced sales.

Finally, regular portfolio reviews are essential. As property values shift and tax laws evolve, revisiting your asset allocation helps ensure you’re not overexposed to high-tax jurisdictions or inefficient ownership structures. Periodic rebalancing is key to staying ahead of potential tax challenges.

Fractional Ownership and Cross-Border Estate Taxes

Fractional property ownership through platforms like Lofty introduces estate tax challenges that differ from those in traditional real estate, as discussed in earlier sections. While this approach makes real estate investment more accessible and diversified, it also comes with specific tax and compliance hurdles that require thoughtful planning.

How Fractional Ownership Impacts Estate Tax Planning

For non-U.S. investors, owning fractional shares in U.S. real estate brings significant estate tax obligations. Each fractional interest in U.S. property is classified as U.S.-situs property for estate tax purposes. The U.S. levies an estate tax of up to 40% on the value of U.S.-situs assets exceeding $60,000 for foreign individuals not domiciled in the country. This becomes a concern for investors who, over time, accumulate multiple small stakes that collectively surpass this threshold.

To put this into perspective, U.S. citizens benefit from a $13.99 million exemption in 2025, while non-U.S. persons are limited to just $60,000. For instance, a $2 million investment property in Austin could result in an estate tax bill of up to $800,000 for a non-U.S. investor, unless the ownership is structured carefully. These complexities demand strict compliance with estate tax regulations.

Compliance and Reporting Requirements

Owning fractional real estate brings added layers of compliance and reporting that can catch investors off guard. The obligations extend beyond simple ownership documentation and often involve navigating multiple tax jurisdictions.

• Form 706-NA: Nonresident, non-domiciliary individuals (NRND) must file this form when U.S.-situs assets exceed $60,000. The estate tax return may also require reporting worldwide assets to calculate deductions and treaty-based credits.
• Transfer Certificates: The IRS may require these certificates to release U.S. assets held by third parties.
• Gift Tax Filing: NRND individuals must file Form 709 for transfers of tangible U.S.-situs property during the tax year. For 2025, the annual gift tax exclusion is $19,000, while gifts to non-U.S.-citizen spouses have a $190,000 exclusion limit.
• State-Level Taxes: Some states have their own estate tax rules, adding another layer of complexity and potential filing requirements.
• Treaty Benefits: Claiming treaty relief involves disclosing worldwide asset values on the U.S. estate tax return and filing Form 8833 to document treaty-based positions.

How Lofty Eases Cross-Border Real Estate Investment

Lofty offers tools and features that simplify estate tax considerations for international investors, making cross-border real estate ownership more manageable.

• Diversified Investments: By allowing smaller capital commitments, Lofty enables investors to build broad U.S. real estate portfolios without concentrating large sums in a single property. This fractional approach can help reduce estate tax exposure by spreading assets across multiple properties and potentially staying below key thresholds.
• Daily Rental Income: The platform’s daily income distribution offers liquidity that traditional real estate investments often lack. This liquidity can be helpful for structuring annual gifts within exclusion limits or covering tax obligations.
• Simplified Management: Lofty handles property management, eliminating the operational burdens that typically come with owning real estate internationally.
• Enhanced Liquidity: The platform’s marketplace allows investors to sell fractional interests more quickly than traditional real estate, which can be crucial when funds are needed to meet estate tax obligations.
• Centralized Reporting: Lofty provides consolidated transaction records and performance data, streamlining compliance efforts. However, professional tax advice remains essential for navigating the complexities of estate tax laws.

The platform’s flexibility and accessibility make it easier for investors to spread their exposure across different property types and markets without the high capital requirements of traditional investments.

"Careful planning prior to the acquisition of real estate in the United States can eliminate an estate tax liability on foreign–owned real estate located in the United States".

While Lofty simplifies many aspects of real estate investment, professional legal and tax guidance is critical to ensure compliance with both U.S. estate tax laws and the regulations in the investor's home country.

Key Takeaways for Cross-Border Estate Tax Planning

Navigating cross-border estate tax planning is especially critical for fractional property owners, particularly with the U.S. estate tax exemption set to drop from $13.99 million to roughly $7 million on January 1, 2026.

To make the most of the current exemption, consider acting before 2026. Strategies like gifting - leveraging the $19,000 annual exclusion per recipient - and restructuring assets can help reduce your future tax burden. Early action is key to establishing a solid foundation for effective cross-border planning.

Understanding your personal and asset profiles is equally important. Your domicile, residency, and the locations of your assets all influence your tax liabilities. For example, non-U.S. persons typically cannot claim the full U.S. exemption for U.S.-situs property, and any assets exceeding the exemption thresholds are subject to a 40% estate tax rate.

Tax treaties can play a vital role in reducing the risk of double taxation. The U.S. has estate and gift tax treaties with 15 countries. However, to benefit from these treaties, you must specifically reference the relevant provisions in your tax filings.

Trusts are another powerful tool in cross-border estate planning. Whether you use U.S.-based or foreign trusts, their effectiveness depends on proper structuring and funding. The trust must align with your unique circumstances while complying with the tax laws of all applicable jurisdictions.

Cross-border estate tax planning is complex, involving the interpretation of treaty provisions, the application of foreign tax credits, and meeting various reporting requirements. Errors in these areas can result in double taxation, penalties, or even the loss of treaty benefits. Working with advisors who have expertise in both U.S. and international tax systems is crucial.

For those investing in fractional properties through platforms like Lofty, estate tax obligations remain, even with streamlined processes. While these platforms manage properties and provide liquidity, investors are still responsible for compliance and reporting related to their U.S.-situs assets.

Finally, regular portfolio reviews are essential. Tax laws and treaties can change, and personal circumstances evolve over time. Consulting with qualified professionals on an ongoing basis ensures your planning remains effective and compliant as your investments and the regulatory landscape shift.

With the right strategies and expert guidance, fractional property owners can effectively manage cross-border estate tax liabilities while growing their wealth.

FAQs

How do I determine my domicile for cross-border estate taxes, and why does it matter?

Your domicile is your permanent home - the place you intend to return to and stay indefinitely. It’s not the same as residency, which is simply where you live physically. Domicile is more about your intentions and the strength of your personal, financial, and emotional connections to a specific location.

Why does this matter? Because your domicile plays a key role in determining how your estate is taxed. If you’re domiciled in the U.S., all your worldwide assets are subject to U.S. gift and estate taxes. On the other hand, if you’re not domiciled in the U.S., only your U.S.-based assets are taxed. By carefully establishing and documenting your domicile, you can reduce tax obligations and create a more efficient estate plan.

How can non-U.S. investors reduce U.S. estate tax liabilities on fractional real estate ownership?

Non-U.S. investors can take steps to minimize U.S. estate tax liabilities on fractional real estate ownership by using a variety of strategies. One popular approach is transferring property into specialized trusts, such as a Qualified Personal Residence Trust (QPRT). This type of trust can help reduce the taxable value of an estate. Another option involves structuring ownership through entities that are not considered U.S. situs assets, which could protect the property from estate taxes.

Investors may also benefit from tax treaties between their home country and the U.S. These agreements might offer exemptions or credits to help avoid double taxation. Tools like credit-shelter trusts can further reduce tax exposure while ensuring wealth is preserved for future generations. Working with a tax professional who understands cross-border estate planning is essential to navigate the complexities and make the most of these strategies.

How can international tax treaties help avoid double taxation on cross-border estates, and what steps are needed to claim these benefits?

International tax treaties aim to prevent double taxation on cross-border estates by determining which country has the primary right to tax and establishing rules to ensure the same estate isn’t taxed twice. These agreements help distribute estate taxes fairly between the involved countries.

To take advantage of these treaties, you'll usually need to provide specific documentation, such as a certificate of tax residency, and follow the procedures outlined in the agreement. This often means submitting the necessary forms to the appropriate tax authorities and adhering to the required deadlines. Carefully reviewing the treaty provisions relevant to your situation is key to making the most of these benefits and avoiding unnecessary tax liabilities.

Related posts

• Cross-Border Estate Planning for Fractional Properties
• U.S. Estate Tax Treaties: What Nonresidents Need to Know