Inheritance Tax on US asset owned by Indian Tax Resident

A. What is Inheritance Tax? ???

On death of a person, their property or assets may get transferred to their legal heirs. Inheritance Tax, is a tax which is levied as a percentage of property or assets, of a deceased person,? which are transferred to their legal heirs on the death of? such an individual. Currently, there is no Inheritance Tax in India, even though a fierce debate on this took place during election campaign. However, certain states in the USA apply inheritance tax on transfer of US assets on death of an individual. Such tax is also levied on transfer of?? shares of US companies on death of an individual, who may be a tax resident of India. The?? rate of tax on such transfer can be as high as 40%.?

B. Significance of Inheritance Tax on transfer of shares of US Companies by an Indian Tax Resident on the death of an individual?

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If a person who is a tax resident of India, owns any shares in a US company, which could be Apple, Google, Amazon,? Microsoft, or any other company, dies, and such shares are transferred to the legal heir, such an event can trigger an inheritance tax of up to 40% in the USA.??

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2. Understanding Inheritance Tax Laws???

A. Overview of Inheritance Tax Laws in India??

In India there is no inheritance tax. There is some discussion on this aspect that has come time and again, but there is no formal law.??

B. Overview of Inheritance Tax Laws in the US???

In the U.S., only six states levy inheritance taxes as of 2023. Taxation varies based on the residence of deceased person or property ownership, value of inherited property, and the beneficiary's relation to the deceased person. The rate of tax can vary from 18%-40%. Each state charge different rate of tax as per its law.?

The tax rates apply uniformly to US citizens, US residents, and non-US residents. Non-US residents get an exemption of $60,000. This tax is levied on the aggregate value of the decedent’s “U.S. situs assets.”??

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Meaning Of U.S. Situs Assets: US situs assets generally include the following: -??

• Real and tangible personal property located in the US;?
• Business assets located in the US;???
• Stock of US corporations.??

The definition of US situs assets may be modified by an applicable estate and gift tax treaty.?

Which State imposes Inheritance Tax??

Inheritance taxes are collected by six U.S. states: Lowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.?In many states, an inheritance tax is imposed on amount exceeding specific limit.???

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For example: If a state charges an inheritance tax on inherited assets exceeding than $1,000,000, and if an individual, lets say. Mr Ashish, receives $1,800,000. the inheritance tax would be a under:?

$1,800,000 - $1,000,000 = $800,000?

Assuming a tax rate of *20%, total tax would be $160,000.?

So, Mr.? Ashish would have to pay $160,000 to the U.S. Government as inheritance tax.?

C. Tax Implications for Indian Residents?

Tax implications in India??

In India, assets received in inheritance are exempted from income tax i.e., the receiver does not? have to pay any income tax on Inherited assets from a deceased person.?? ??

3. Strategies for Mitigation???

A. Utilising Tax Treaties? ???

One can explore the relevant Tax Treaty with USA to identify if inheritance tax is covered therein and if any tax exemption can be claimed under the Treaty.??

4. Case Studies?

1. John, a resident of Pennsylvania, passes away, leaving behind an estate valued at $6 million. His beneficiaries include his spouse, a minor son, and an adult daughter. Pennsylvania imposes inheritance tax rates ranging from 4% to 15% based on the relationship between the deceased and the beneficiaries:?

Spouse: Exempt from inheritance tax.?

Minor Child: Exempt from inheritance tax??

Adult Child:? exempt up to $3,500. Tax rate of 4%.?

John's estate would incur inheritance tax liabilities based on the applicable rates in terms of? the relationship of? each beneficiary with him.?

Suppose in his Will, he gave $2 million each to his spouse, minor son and his adult? daughter??? .?

Tax Liability?

Now, the tax liability will be calculated as under :?

Spouse: 2 million* 0%= 0(Exempt)?

Minor Son: 2 million*0%= 0 (Exempt)?

Adult Daughter: (2 million-3500)*4%= $79860?

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2. Michael, a resident of Iowa, passes away, leaving behind an estate valued at $9 million. His beneficiaries include his spouse & two children. Lowa imposes inheritance tax rates ranging from 5% to 15% based on the relationship between the deceased and the beneficiaries:?

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Spouse: Exempt from inheritance tax.?

Children: Taxed at a rate of 5%.?

Michael's estate would incur inheritance tax liabilities based on the applicable rates as per the relationship of each beneficiary to him.?

Suppose he transfers equal share to his wife, 1st child and 2nd child.??

Tax Liability?

Now their tax liability is calculated as??

Spouse: 3 million * 0%= 0?

Child 1: 3 million?? *5%= $150000?

Child 2: 3 million?? *5%= $150000?

3. Jim, a resident of New Jersy, passes away, leaving behind an estate valued at $ 4 million. His beneficiaries include his spouse - Elena, and Jim’s parents. New Jersy imposes inheritance tax rates ranging from 11% to 16% based on the relationship between the deceased and the beneficiaries:?

Spouse: Exempt from inheritance tax.?

Parents: Exempt from inheritance tax.?

Jim’s estate would incur inheritance tax liabilities based on the applicable rates as per the relationship of each beneficiary to him.?

Suppose he transfers 2 million to his wife, remaining to each of his parent equally.??

Tax Liability?

Now, the tax liability will be calculated as:?

Spouse: 2 million* 0%= 0 (Exempt)?

Mother: 1 million*0%= 0 (Exempt)?

Father:? 1 million*0%= 0 (Exempt)?

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