How Does Renouncing Affect My US Estate Tax Exposure at Death?

The number of people who renounce their US citizenship is growing each year. 

But why do so many choose to leave the Land of the Free?

There are many reasons. 

Some people decide to renounce their US citizenship because they’ve lived outside the country their whole lives. Although they may not have any income from the US, they are subject to US tax on their worldwide income. 

Others may have had enough of living in the US and want to pay less tax and have a better lifestyle elsewhere.  

The main reasons that most people renounce their US citizenship are based on either cost or complexity.

Firstly, if you’re a US citizen, you have to file a US tax return every year to report your worldwide income, even if none of it is actually from the US. 

People end up in situations where they might not have to pay any US tax but must still file that tax return. 

Whether they do it themselves or choose to hire someone, it takes a lot of time, and it can be costly.

The second reason concerns the general complexity of managing and reporting your financial affairs as a US expat living abroad.

Whenever you want to invest in something or open a bank account, someone always waits to tell you you shouldn’t or can’t because you’re a US citizen. 

Figuring out where you stand as a US person living abroad can be difficult. Knowing which rules apply to you in another country and which don’t can be a source of confusion.  

What Does Renunciation of US Citizenship Mean? 

Renouncing US citizenship is an irrevocable act that means you give up the right to live, work and vote in the US and receive consular protection while abroad. 

In short, you lose all the rights and privileges of having a US passport. 

If you decide to renounce, you must make an appointment with the US consulate, complete some forms and have an in-person interview to discuss your reasons. We cover the process in detail in our ultimate guide on How to Renounce Your US Citizenship. 

The whole process can take a few months, and you’ll need to pay a fee of US$2,350. 

Once you renounce, you can’t just change your mind and revoke your decision – you have to start from the very beginning at the back of the immigration queue. 

The Pros and Cons of Renouncing

It’s a critical decision that you need to make carefully. There are some pros and cons to be aware of. On the plus side, you are free from obligation to the Internal Revenue Service (IRS).

However, the most significant downsides are:

• No longer being able to access the US job market
• Facing more difficulties entering the US
• Not being able to vote in US elections
• Not having US consular protection, such as emergency evacuation from a war zone.

Another factor to consider is the taxes that are due when you leave because, like it or not, if you have assets in the US, you will have to pay taxes on them. 

Tax Consequences of Renouncing US Citizenship

Two things in life are inevitable – death and taxes. 

Whether you leave the US or renounce your US citizenship, you will pay tax on your income and capital gains at some point.

When you renounce, the IRS conducts a deemed disposal of your assets to determine your capital gain and how much exit tax you must pay.

The good news is that you get some exemption here. You can claim US$868,000 as an exemption (based on the 2024 figure)  but pay capital gain rates on anything above that.  

That’s provided you are not a covered expatriate who must pay an exit tax on all their assets. 

You are considered a covered expatriate if you’re a US citizen or a US green card holder for at least eight of the past 15 years on the date you exit the US tax system  and you meet any of the following three tests on the exit date: 

• Your average annual net income tax in the US was more than US$201,000 (2024 threshold, indexed to inflation) in the previous five years. 
• Your net worth is at least US$2 million.
• You are not compliant with your US federal tax filing obligations and payment of tax in the last five years.

If you do not meet any of these tests, you will not be a covered expatriate and, therefore, are not subject to any of the exit taxes when you renounce. 

The US$2 million threshold is typically the biggest problem for people, but planning opportunities are associated with that. 

On the day you renounce, the US Government imposes a market-to-market exit tax on all your assets. So, the exit tax is a hypothetical sale of your businesses and assets. 

All property of a covered expatriate is deemed sold for its fair market value under a market-to-market regime. 

Dual Citizen Exception

Under the dual citizen exception, a renouncer who fails either of the first two covered expatriate conditions above (the net income or net worth tests) will still be exempt from the exit tax if the following conditions are met:

• You became a US citizen at birth
• You also became a citizen of another country at birth
• On the expatriation date, you continue to be a citizen of that other country
• On the expatriation date, you are taxed as a resident of that other country
• You have been a resident of the United States for not more than 10 taxable years during the 15-taxable year period ending with the expatriation year.

Renouncing US Citizenship and US Estate Taxes 

One of the main taxes often overlooked when people consider renouncing is the US estate tax. 

The first thing to understand is the difference between estate and inheritance taxes. Many people use the term interchangeably, but this is a mistake.

So, let’s clarify the difference:

• Estate tax: Levied on the total value of a decedent’s estate at the time of their passing, and it is the responsibility of the estate to fulfill this financial obligation with the tax authorities. Estate taxes are borne by the estate itself, and the executor is tasked with filing a single estate tax return and settling the tax from the estate’s funds.

• Inheritance tax: Imposed on the beneficiaries based on the assets they receive from the estate. It is the heirs who bear the tax burden, as opposed to the Estate itself. Inheritance tax is calculated according to the value of individual bequests received from the deceased’s estate, and the beneficiaries are accountable for fulfilling all tax obligations. 

It’s important to note that at the Federal level, the US does not levy an inheritance tax. The Federal government only levies an estate tax. There are, however, six US States that do levy an inheritance tax, and these are: 

• Iowa 
• Kentucky 
• Maryland 
• New Jersey 
• Pennsylvania 
• Nebraska.

In addition to Federal Estate taxes, the residents of the following US States also have to deal with estate taxes at the State level: 

• Maryland 
• New York 
• Vermont 
• Illinois 
• Rhode Island 
• Maine 
• Massachusetts 
• Minnesota 
• Oregon 
• Washington 
• Hawaii 
• District of Columbia 
• Connecticut.

Renouncing shields your non-US assets from an estate tax exposure. 

However, the estate tax also applies to US property owned by non-US citizens.

Even if you renounce your US citizenship and own property in the US, you’ll eventually have to deal with the estate tax.

Regarding estate taxes, there are pros and cons to renouncing. 

An estate tax is levied on the transfer of your property at death. A federal tax of up to 40% applies to property wherever a US citizen may own it. 

The main benefit of renouncing is that your non-US assets are shielded from any exposure to estate tax. 

Whatever way you slice it, if you maintain property in the US and have assets like stocks, they will still be subject to US estate tax when you die. 

The decision to renounce should not be taken lightly, especially given the loss in terms of the estate tax. 

It should be noted that when you renounce, you lose the ability to shield any property you own from estate tax. 

Currently, US citizens can shield up to US$13.61 million in property from the estate tax for deaths in 2025. 

Non-US citizens who are not domiciled in the US, on the other hand, can only shelter a meagre US$60,000. 

Ultimately, when renouncing, you have two choices:

• Maintaining property and assets in the US that will be subject to the death tax.
• If you sell your US assets when you renounce, you will be subject to an exit tax on any gain, but the death tax burden will be entirely removed.

The latter frees you up to move to a country with no estate taxes.

What Assets Are Part of a US Taxable Estate?

US taxable estate includes what are known as US situs assets. These are assets that have a connection to the U. and are generally subject to US estate tax. 

They typically include, but are not limited to:

• US real estate (e.g., homes, land, rental properties)
• US stocks and exchange-traded funds (ETFs) 
• Tangible personal property physically located in the US, such as jewellery, vehicles and boats.
• US-based retirement accounts, including 401(k) plans and individual retirement accounts (IRAs)
• Investment accounts with US brokerage firms, excluding cash deposits held at US banks
• Cash or currency stored in US safe deposit boxes.

Assets Not Considered US Situs for Estate Tax Purposes:

Certain assets with US ties are generally excluded from US estate tax. 

These include:

• Bonds, debentures and other debt obligations issued by US individuals, US corporations and US governments as long as they’re specifically exempt under the portfolio interest exemption  
• Certificates of Deposit (CDs) held at US Banks
• Personal US bank accounts (checking or savings) that are not connected to a US trade or business
• American Depositary Receipts (ADRs) representing shares of non-US  companies
• US$-denominated securities and bonds issued by non-US entities
• Non-US mutual funds and ETFs that hold US securities. 

Who Is Subject to US Estate Tax?  

Since 2018, US citizens and US domiciliaries have been subject to estate and gift taxation at a maximum tax rate of 40% on worldwide assets.

Meanwhile, non-US citizens who are not domiciled in the US are only exposed to US estate tax on US situ assets. 

It is important to note that while having a green card makes its holder a US person for Income tax purposes, it does not necessarily make that person a US domiciliary.

It is, therefore, theoretically possible to be a green card holder and non-domiciliary, in which case US estate tax exposure would be limited to US Situs assets only. 

The reverse is also true, making it theoretically possible to be a non-resident alien for income tax purposes but a US domiciliary for Estate tax purposes, in which case that individual would not owe any income tax to the United States of America but would be subject to US estate tax on global assets. 

US citizens are always considered to be US domiciliaries. 

Legally speaking, domicile and residence are two distinct legal concepts. Domicile is the location of a person’s vital interest and where that person intends to stay indefinitely. 

In order to determine if a person is domiciled in the US, the following factors are taken into consideration:

• Residential property and lifestyle in the US: An individual’s intentions regarding their permanent home are often reflected in their residence and lifestyle. Therefore, these factors are highly relevant in determining domicile. Owning a spacious and well-furnished home in the US, where an individual keeps most of their personal belongings, as opposed to renting a small and minimally decorated studio apartment, will be considered evidence of domicile in the US.

• Statements of intent: Expressing the intention to reside or remain in the US on tax returns, estate planning documents, immigration-related forms or personal correspondence will also be considered as supporting evidence of domicile in the US.

• Visas and work permits: Possessing a US immigrant visa, a green card, or a US Social Security number will be taken into account as evidence of domicile in the US. However, it is important to note that having these documents alone is not determinative; they are just one factor among others.

• Location of business interests: Having significant business and property interests in the United States, particularly if they outweigh those in any other country, will be considered evidence of domicile in the US.

• Location of family members: Having family members present in the US and a family history of immigration to the US will be seen as evidence of domicile in the US.

• Motivation for being in the US: Choosing to be in the US rather than being compelled by necessity or other compelling reasons (such as health reasons) will be considered as evidence of domicile in the US.

• Length of time in the US: Spending extended periods of time in the US as opposed to shorter durations will be considered as evidence of domicile in the US.

• Community affiliations: Having personal, political, charitable, spiritual and social affiliations based in the US, particularly if they hold more significance than those in another country, will be considered evidence of domicile in the US.

• Voting registration, driver’s license and other memberships: Registering to vote, obtaining a driver’s license or joining other organisations in the US will be taken into account as evidence of domicile in the US.

In the case of non-US citizens who are not domiciled in the US, it is vital to avoid US estate tax on US situ assets as the exemption amount is extremely low, at only US$60,000. 

The following alternatives may be utilised to avoid US estate taxes on US Situs assets for non-US citizens who are not domiciled in the United States of America: 

• Use a foreign (non-US) corporation to act as a blocker for US situs assets 
• Use an Irrevocable US Trust to hold US Situs Assets, essentially removing the US situs assets from the estate of the non-US citizen who is not domiciled in the US. 
• Invest in US assets that are not subject to US estate taxes, such as: a) American Depository Receipts b) US Corporate and Government Bonds that are subject to the portfolio interest exemption c) US Treasury Bills or d) US Certificates of Deposit.

Real-Life Scenarios

1. A US citizen passes away: 

When a US citizen passes away, he will be subject to Federal Estate Tax regardless of where his main place of residence was or where his assets are located.

The US immigration status of the heirs is irrelevant. The tax applies by virtue of the fact the decedent was a US Citizen. 

If the heirs are located in a civil law jurisdiction where inheritance tax generally applies, there may be a high risk of double taxation. 

As estate taxes and inheritance taxes create two distinct taxable events, they do not necessarily cancel each other out. 

In this scenario, the executor of the Estate would need to file a tax return for the Estate and pay all taxes before any assets can be distributed to the heirs. 

In addition to paying taxes, the Estate’s executor must also pay all existing debts the Estate may have. 

If there are any funds remaining in the Estate after both private creditors and the IRS get paid in full, then those remaining assets get passed on to the heirs of the decedent. 

2. A US citizen receives an inheritance from a non-resident alien: 

This is not a taxable event at the Federal level. No taxes would be owed to the US federal government by US citizens under this scenario. 

They may potentially exist a taxable event at the State level for residents of the following US States: 

• Iowa 
• Kentucky 
• Maryland 
• New Jersey 
• Pennsylvania 
• Nebraska 

While there are no specific taxes or restrictions on receiving non-US assets for US citizens, any bequests or gifts exceeding US$100,000 from foreign persons in a calendar year must be reported to the IRS on Form 3520, known as the ’Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.’ 

The form above requires disclosure of the amount and description of the bequest but not the identity of the decedent or donor. 

From the moment he assumes ownership, the US citizen heir is responsible for completing all the reports and disclosure forms required by the IRS, such as the FBAR and Form 8938. 

3. A US Citizen receives an inheritance from a former US Citizens who is a covered expatriate: 

If a US citizen receives an inheritance from a former US citizen who is a covered expatriate, the Federal government of the US does apply a form of ’inheritance tax’ which acts as a substitute for the estate tax which would have been perceived had the covered expatriate not renounced US citizenship.  

A covered bequest generally is any property acquired by reason of the death of a covered expatriate. 

US situs assets in the covered expatriate’s estate are usually not considered covered bequests (if properly reported), as all non-resident aliens, including covered expatriates, must pay US estate taxes on US situs assets. 

Surviving US citizen spouses and US charities are generally exempted from the application of the special ’covered bequest tax’.  

If a US person inherits assets that are not subject to US estate tax from a former US citizen who is a covered expatriate (i.e., non-US stocks or non-US real estate), then a substitute inheritance applies. 

The IRS essentially found a way to tax the estates of former citizens by imposing the tax on the heirs the former US Citizens leave behind after passing away. 

US Charities and US person spouses do not have to pay the substitute inheritance tax. They are exempted. 

Non-resident aliens of the United States of America are beyond the reach of the IRS and, therefore, cannot be taxed by the IRS in the case of inheritance.

Renouncing US Citizenship and Estate Taxes: FAQs

Moving to a Country With No Estate Taxes 

There are plenty of countries that have no estate tax. If you want to escape estate taxes altogether, we list 16 of them here. 

These are necessarily far-flung tax havens; they include countries like Singapore, Canada, Mexico, Portugal and Hong Kong. 

While the US authorities forbid stating that your reason for renouncing US citizenship is to lower your taxes, this can certainly be an outcome of taking the plunge. 

Because you risk being stateless if you don’t, you should consider applying for citizenship in another country before you renounce. 

This opens up a world of possibilities for lifestyle benefits, lower taxes (or no taxes), and new opportunities.

The traditional routes include naturalisation, marriage and family ties, all of which are heavily bureaucratic and take time to complete. 

On the other hand, citizenship by investment is an option if you can afford it. By paying a certain amount, investing in property or funds, or starting a business, you can gain citizenship in places that have no taxes at all. 

With a faster timeline to citizenship and the ability to include family members, a new life overseas can be yours in return for a specified sum. 

It can be at the less expensive end of the market on a Caribbean island where you can bask in the sun and come and go as you please. 

Or, it can be in one of Europe’s more prestigious programs. You decide. 

Whatever the case, it will take planning, and that’s where Nomad Capitalist comes in. 

We create and implement bespoke, holistic strategies for successful investors and entrepreneurs to legally reduce their tax bills and diversify and protect their assets. To maximise your financial freedom, become a client today.