You will be able to explain why a Singapore resident holding US shares may owe US estate tax, and why it surprises people.
Rachel's father has bought US shares for twenty years through an overseas broker. He is proud of the portfolio and mentions it at most family dinners. Last month Rachel read something about US tax being charged on the shares of foreigners who die, and she asked him about it. He laughed. Singapore has no death tax, he said, so there was nothing to worry about.
He was right about Singapore and wrong about the conclusion. This lesson explains why.
Singapore abolished estate duty in 2008, as IRAS explains on its website. When someone dies here, there is no Singapore tax on the value of what they leave. That is why so many Singapore investors, like Rachel's father, assume nobody can tax their estate.
The US works differently. It has a federal estate tax, charged on the value of what a person owns when they die. And it does not stop at US citizens and residents. For a person who is neither, called a non-resident alien in US tax language, the US taxes the part of their estate that is located in the US. Those are US-situs assets, and shares of US companies are the main example for investors. Lesson 4.2, Which of your holdings count as US assets, sorts out which holdings count.
So the fact that Singapore has no estate duty does not help with US shares. The tax comes from the US, on assets the US considers its own, whichever country the owner lived in.
US estate tax has an exemption: an amount of US-situs assets that can pass without tax. Only the value above it is taxed.
For US citizens and residents, the exemption is large enough that most families never pay estate tax. For non-resident aliens it is far lower. The difference is so large that a non-resident with a moderate US portfolio can be over the limit while an American with many times as much owes nothing. People who read about US estate tax in American articles often come away thinking it only touches the very rich. For a Singapore investor that conclusion is wrong.
The exemption for non-resident aliens is set in US law and can change. Look up the current figure on the IRS website, on its pages about estate tax for non-residents who are not citizens of the United States. Write it down with the date you checked. Do not rely on a figure from a forum or an old article.
Above the exemption, the tax is charged at graduated rates that rise as the taxable amount grows, and they reach high levels on sizeable estates. The current rate schedule is in the IRS instructions for the estate tax return. Read it once, because it changes how you think about a portfolio that keeps growing.
The steep rates are the reason exposure grows quickly. A portfolio just below the exemption owes nothing. One well above it can owe a large share of the excess, and a growing portfolio crosses the threshold in a single good year without anyone noticing. Lesson 4.4, Estimate your family's exposure, puts your own numbers against the line.
Some countries have an estate tax treaty with the US that changes how this works for their residents. Singapore does not have one, so a Singapore resident is generally left with the standard non-resident rules. If you are a national or resident of another country as well, ask a tax professional whether its treaty position affects you.
The tax is not collected automatically like dividend withholding. When a non-resident alien dies holding US-situs assets, the executor may need to file an estate tax return with the IRS. For non-residents, it is Form 706-NA. The IRS instructions for that form set out when it must be filed, what values to report and what supporting documents to attach.
That puts the work on the executor, often a spouse or adult child, who may never have heard of the IRS form and may not even know the overseas account exists. Lesson 4.3, What your family faces to get the shares back, walks through what they would face.
The surprise comes from three things lining up. Singapore has no estate duty, so people assume there is no tax on death. Most American writing on estate tax describes the citizens' exemption, which is far larger. And nothing about the tax shows up while you are alive. No statement line, no withholding, no reminder from the broker. You only find out when your family does.
Rachel's father went quiet when she showed him the IRS page. Then he asked her to look up the exemption figure and the form his executor would need. That is the activity for this lesson: find the IRS page on estate tax for non-resident aliens, write down the current exemption and the form the executor would file, and note the date you checked.
Find the IRS page on estate tax for non-resident aliens and write down the current exemption and the form the executor would file.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).