The Form 706-NA: Non-Resident & Non-Citizen U.S. Estate Tax

The Form 706-NA: Non-Residents & Non-Citizen Estate Tax

An Overview of Form 706-NA 

While a 706 Form is in an estate tax return for US taxpayers, there is another version of the form, 706-NA which is used for taxpayers who were non-resident aliens at the time that they passed away. The Form 706-NA (United States Estate (and Generation-Skipping Transfer) Tax Return Estate of nonresident not a citizen of the United States) is similar to the 706 but has additional complications based on the fact that the decedent is not a U.S. person so it does not derive the benefit of the exemption/exclusion that U.S. citizens and other residents enjoy. Having to file this form is oftentimes an (unexpected) surprise for the estate of the decedent — which is usually administered in a foreign country unless the majority of the estate is in the United States. Let’s walk through form 706-NA to get an idea of what the estate will need to do when the decedent is a non-resident alien who owns US property.

Part I Decedent, Executor, and Attorney

The first part of form 706NA is used to provide the Internal Revenue Service with information about who passed away, who is the executor of the estate, and if there is an attorney, the name and identifying information of the attorney.

• • • Decedent’s first (given) name and middle initial and Decedent’s last (family) name

      • U.S. taxpayer ID number (if any)

      • Place of death

      • Domicile at time of death

      • Citizenship (nationality)

      • Date of death

      • Date of birth

      • Place of birth

      • Business or occupation

    • Name of executor

      • Address (city or town, state or province, country, and ZIP or foreign postal code)

• • • • Telephone number

      • Fax number

      • Email address

        If there are multiple executors or attorneys, check here and attach a list

    • Name of attorney for estate

      • Address (city or town, state or province, country, and ZIP or foreign postal code)

      • Telephone number

      • Fax number

      • Email address

Who is a Non-Resident of the U.S.?

A 706-NA applies to taxpayers who are non-US citizens and to non-residents (who do not qualify as being domiciled in the United States).  The purpose of the acronym is to distinguish that U.S. citizens living abroad are still considered U.S. citizens for tax purposes and that the 706-NA applies to foreign non-residents (and not foreign residents of the United States).

As provided by the IRS:

• • • “Nonresident not a citizen (NRNC) of the United States. For estate tax purposes, a decedent is an NRNC of the United States if the decedent is neither domiciled in nor a citizen of the United States at the time of death. A decedent who acquired U.S. citizenship solely by reason of being a citizen of a U.S. territory or by reason of birth or residence within a U.S. territory is not treated as a U.S. citizen.”

Who Must File a Form 706-NA

Unlike the thresholds for people who qualify as you for state tax purposes the threshold for NRNC is much lower, and clocks in at only $60,000. Thus, taxpayers whose state exceeds exceed $60,000 must file this IRS Form 706-NA.

• • • “The executor must file Form 706-NA if the date of death value of the decedent’s U.S.-situated assets, together with the gift tax specific exemption and the amount of adjusted taxable gifts, exceeds the filing threshold of $60,000.

    • The gift tax specific exemption refers to the amount allowed for gifts made by the decedent between September 9, 1976, and December 31, 1976, inclusive. The amount of adjusted taxable gifts refers to the amount of adjusted taxable gifts made by the decedent after December 31, 1976.”

When To File File Form 706-NA

While the form is due nine months (date of death), taxpayers may qualify for an extension by filing a Form 4768.

• • • “If you are unable to file Form 706-NA by the due date, use Form 4768, Application for Extension of Time To File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes, to apply for an automatic 6-month extension of time to file. If you have already received a 6-month extension and are an executor who is out of the country, you may apply for an additional extension of time to file by filing a second Form 4768 and completing the form and attaching a written statement of explanation as instructed. For both extensions, check the “Form 706-NA” box in Part II of Form 4768.”

Death Tax Treaties

While the United States has entered into nearly 60 income tax treaties with foreign countries the number of estate or death tax treaties is much more limited at 16.

Death Tax Treaties Death tax treaties are in effect in the following countries.

1. 1. 1. Australia

      2. Ireland

      3. Austria

      4. Italy

      5. Canada*

      6. Japan

      7. Denmark

      8. Netherlands

      9. Finland

      10. South Africa

      11. France

      12. Switzerland

      13. Germany

      14. United Kingdom

      15. Greece

*Article XXIX B of the United States–Canada Income Tax Treaty.

Computing the Estate Tax

When it comes to computing these state tax, it can get relatively complicated, but let’s walk through the basics of Part 2 for the tax computation on form 706-NA

Taxable estate from Schedule B, line 9:

1. 1. 1. Total taxable gifts of tangible or intangible property located in the U.S., transferred (directly or indirectly) by the decedent after December 31, 1976, and not included in the gross estate (see section 2511) )

      2. Add lines 1 and 2

      3. Tentative tax on the amount on line 3 (see instructions)

      4. Tentative tax on the amount on line 2 (see instructions

      5. Gross estate tax. Subtract line 5 from line 4

      6. Unified credit. Enter smaller of line 6 amount or maximum allowed (see instructions)

      7. Subtract line 7 from line 6

      8. Other credits (see instructions

      9. Credit for tax on prior transfers. Attach Schedule Q, Form 706

      10. Add lines 9 and

      11. Net estate tax. Subtract line 11 from line

      12. Total generation-skipping transfer tax. Attach Schedule R, Form 706

      13. Total transfer taxes. Add lines 12 and 13

      14. Earlier payments. See instructions and attach explanation

      15. Balance due. Subtract line 15 from line 14 (see instructions) .

How to Determine The Gross Estate Assets

One of the most important aspects of determining the gross estate for 706 NA is the fact that only your US assets are included as part of the gross estate subject to tax for an NRNC.

As provided by the IRS:

• Schedule A. Gross Estate in the United States
  • Before you complete Schedule A, you must determine what assets are included in the decedent’s entire gross estate, wherever located. However, list on Schedule A only those assets located in the United States. Enter the total value of assets located outside the United States on line 2 of Schedule B.

• Entire gross estate.

  • • • The entire gross estate is figured the same way for an NRNC decedent as for a U.S. citizen or resident. It consists of all property the decedent beneficially owned, wherever located, and includes the following property interests.

      • Generally, the full value of property the decedent owned at the time of death as a joint tenant with right of survivorship (but if the surviving spouse is a U.S. citizen, then only half the value of property held by the decedent and surviving spouse either as joint tenants with right of survivorship or as tenants by the entirety). For exceptions, see the Instructions for Form 706, Schedule E.

      • Property the decedent and a surviving spouse owned as community property to the extent of the decedent’s interest in the property under applicable state, possession, or foreign law.

      • A surviving spouse’s dower or curtesy interest and all substitute interests created by statute.

      • Proceeds of insurance on the decedent’s life, generally including proceeds receivable by beneficiaries other than the estate.

      • Several kinds of transfers the decedent made before death.

      • Property in which the decedent either held a general power of appointment at the time of death, or used or released this power in certain ways before death.

      • Certain annuities to surviving beneficiaries.

      • For additional information concerning joint tenancies, tenancies by the entirety, annuities, life insurance, transfers during life, and powers of appointment, see the Instructions for Form 706.

      • Enter on Schedule A all of the assets that meet both of the following tests.

        • They are included in the entire gross estate.

        • They are located in the United States

Which Assets are Considered U.S. Situs?

The instruction provides a summary of the different types of assets and whether or not those assets are considered located in the United States, noting that if there is a tax treaty in place it may impact whether the asset is included in the gross estate even if it would otherwise be considered a US sitis for 706NA purposes.

As provided by the IRS in pertinent part:

Real estate and tangible personal property

Real estate and tangible personal property are located in the United States if they are physically located there. Note. An exception is made for works of art that are owned by an NRNC decedent and are located within the United States if on the date of death, the works of art are:

• • • Imported solely for public exhibition,

    • On loan to a nonprofit public gallery or museum, and

    • On exhibition or en route to or from exhibition.

Stock

• • • Generally, no matter where stock certificates are physically located, stock of corporations organized in or under U.S. law is property located in the United States, and all other corporate stock is property located outside the United States.

Insurance proceeds.

• • •  Proceeds of insurance policies on the decedent’s life are property located outside the United States.

Debt obligations within United States.

• • • Debt obligations are generally property located in the United States if they are debts of a U.S. citizen or resident, a domestic partnership or corporation, a domestic estate or trust, the United States, a state or state’s political subdivision, or the District of Columbia.

Debt obligations outside United States.

• • • The following debt obligations are generally treated as located outside the United States.

    • Debt obligations (whether registered or unregistered) issued after July 18, 1984, if the interest on them would be eligible for tax exemption under section 871(h)(1) had such interest been received by the decedent at the time of the decedent’s death. However, if the debt earns contingent interest, some or all of it may be considered property in the United States (section 2105(b)(3)).

    • Certain short-term original issue discount debt obligations.

    • See section 2105(b)(4) for details.

Deposits

• • • The following deposits are treated as located outside the United States if they are not effectively connected with conducting a trade or business within the United States.

    • A deposit with a U.S. bank or a U.S. banking branch of a foreign corporation.

    • A deposit or withdrawable account with a savings and loan association chartered and supervised under federal or state law.

    • An amount held by a U.S. insurance company under an agreement to pay interest.

    • A deposit in a foreign branch of a U.S. bank.

    • If an asset is included in the total gross estate because  the decedent owned it at the time of death, apply the above location rules as of the date of the decedent’s death. However, if an asset is included in the decedent’s total gross estate under one of the transfer provisions (sections 2035, 2036, 2037, and 2038), it is treated as located in the United States if it fulfills these rules either at the time of the transfer or at the time of death.

    • For example, if an item of tangible personal property was physically located in the United States on the date of a section 2038 transfer but had been moved outside the United States at the time of the decedent’s death, the item would be considered still located in the United States and should be listed on Schedule A.

    • If the decedent was a U.S. expatriate subject to 877(b) at the time of death, the decedent is treated as owning a prorated share of the U.S. property held by a foreign corporation in which the decedent directly or indirectly owned at least 10% of the voting stock and, directly, indirectly, or constructively, owned more than 50% of the stock by vote or value (section 2107(b)).

Decedent Foreign Asset Reporting or U.S. Tax Non-Compliance

Sometimes, it is not until after someone has passed away that the estate learns that the taxpayer may have had some foreign account reporting requirements that were missed — which could result in fines and penalties for the decedent and/or the estate. This could be because the taxpayer was previously a U.S. person for income tax purposes and/or may have been an NRNC but had certain US assets that qualified as a US person that owned foreign accounts, assets, or investments, that would have required reporting to the U.S. government on forms such as the FBAR and FATCA Form 8938.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.