The $60,000 Surprise: A Foreign Investor’s Guide to the U.S. Estate Tax

How a Turkish investor with U.S. stocks in a Swiss bank could face a six-figure tax bill—and the playbook to prevent it.

Introduction: The Hidden Risk in Your U.S. Portfolio

Imagine a savvy Turkish businessman, let’s call him Mr. Demir. Over the years, he has prudently diversified his wealth. He invested in the world’s most dynamic market, accumulating a portfolio of approximately 500,000 USD in blue-chip American stocks. These include household names like Apple, Microsoft, Amazon, and a popular S&P 500 ETF. For security and sophisticated management, he holds these assets in a prestigious Swiss bank account. Consequently, he rests easy, confident that his financial legacy for his family in Turkey is secure.

Then, the unthinkable happens. Following Mr. Demir’s passing, his heirs in Turkey contact the Swiss bank to settle his affairs. They receive a stunning response: the account is frozen. The bank explains that it cannot release the U.S. securities without clearance from an entity they never expected to deal with—the United States Internal Revenue Service (IRS). This is their first, jarring encounter with the U.S. estate tax for non-resident aliens (NRAs). The family is about to discover that their inheritance is not only tied up in a bureaucratic labyrinth but is also at risk of shrinking by over 100,000 USD.

Mr. Demir’s story is not unique; in fact, it is a cautionary tale for thousands of international investors who hold U.S. assets. This report will serve as a comprehensive guide to navigating this treacherous landscape. We will dissect the punitive U.S. estate tax system for NRAs and explain precisely why holding U.S. stocks in a foreign account offers no protection. Furthermore, we will walk through the costly and complex process Mr. Demir’s heirs now face. Most importantly, this report provides a clear, actionable playbook of expert-level strategies to legally and effectively shield a U.S. portfolio from this often-overlooked but financially devastating tax.

America’s Two-Tiered Estate Tax System

The United States tax code operates on a starkly divided system for estate tax. It applies drastically different rules depending on a single, critical distinction: whether a person is a U.S. citizen or “domiciliary,” or a “non-resident alien” (NRA). This classification is the most important factor in international estate planning and the source of many costly surprises for foreign investors.

The Advantage for U.S. Citizens and Domiciliaries

The federal government provides a substantial shield against estate tax for its citizens and “domiciliaries.” This shield comes in the form of the unified gift and estate tax exemption, a generous amount that allows a person to transfer a significant fortune to their heirs without triggering federal tax. For deaths occurring in 2024, this exemption stands at a remarkable $13.61 million. For 2025, this figure, which the government adjusts annually for inflation, rises to $13.99 million.

This means a U.S. person can pass on nearly $14 million in worldwide assets—including property and investments held in any country—before their estate owes any federal tax. For married couples, this amount can effectively be doubled. Because of this high threshold, many call the federal estate tax a “rich person’s tax” in the U.S., as it affects only a tiny fraction of the wealthiest American estates.

The Harsh Reality for Non-Resident Aliens (NRAs)

The picture changes dramatically for a non-resident alien. Instead of a multi-million-dollar shield, the U.S. tax code grants an NRA a federal estate tax exemption of a mere $60,000. This paltry sum is not a recent development. In fact, it has remained fixed for decades, unadjusted for inflation, making it progressively more punitive over time.

Any U.S.-based assets valued above this minimal threshold face a progressive tax that begins at 18% and rapidly climbs to a top rate of 40% for taxable amounts exceeding $1 million. This structure transforms the estate tax from a concern for the ultra-wealthy into a significant and immediate threat for any moderately successful foreign investor with U.S. holdings. For instance, an NRA with just $100,000 in U.S. stocks would find $40,000 of it exposed to tax. For Mr. Demir’s $500,000 portfolio, $440,000 is on the chopping block.

Defining Your Status: Residency vs. Domicile

Understanding which set of rules applies hinges on the decedent’s status, but here lies another layer of complexity. Crucially, the U.S. tax code uses different tests to determine residency for income tax versus estate and gift tax.

For income tax, objective, mathematical criteria determine U.S. residency. An individual is a U.S. resident if they meet either the “green card test” or the “substantial presence test,” which is a formula based on the number of days spent in the U.S. over a three-year period.

For estate and gift tax, however, the determining factor is not residency but “domicile.” Domicile is a far more subjective concept based on a person’s intent. The IRS defines domicile as living in a place, even for a brief period, with “no definite present intention of moving therefrom”. Proving this intent involves a “facts and circumstances” analysis of a person’s life. Factors the IRS may consider include the location of residences, family, and business interests, as well as declarations of intent made in legal documents.

This distinction is crucial because an individual can be a U.S. resident for income tax purposes but a non-domiciliary for estate tax purposes, or vice-versa. In Mr. Demir’s case, a Turkish citizen living and working in Turkey, the classification is clear: he is a non-domiciliary and therefore an NRA for U.S. estate tax purposes.

The “Situs” Rule: Why a Foreign Bank Account Offers No Protection

The U.S. estate tax for non-resident aliens triggers based on a concept known as “situs,” which simply means the location of the asset for tax purposes. International investors frequently misunderstand this critical rule, and many believe that holding their U.S. investments in a foreign financial institution insulates them from the IRS. This belief is dangerously incorrect.

Debunking a Dangerous Myth

The location of the investor or their brokerage account does not matter; what matters is the legal and economic location of the underlying asset itself. For U.S. estate tax purposes, the law unequivocally defines shares of stock in a U.S. corporation as “U.S.-situs” assets.⁶ This includes the shares of Apple, Microsoft, Amazon, and any other publicly traded U.S. company. Similarly, U.S.-domiciled investment vehicles like most exchange-traded funds (ETFs) are also U.S.-situs assets.

Therefore, Mr. Demir’s portfolio of U.S. stocks, held in his Swiss bank account, is fully subject to the U.S. estate tax. The Swiss bank merely acts as a caretaker for assets that, in the eyes of U.S. law, are located within the United States. Upon his death, the bank recognizes its legal obligation not to transfer these U.S. assets until it receives clearance from the IRS, leading to the account freeze that so often shocks unsuspecting heirs.

A Practical Guide to U.S. Situs for NRAs

Understanding which assets the IRS considers to have a U.S. situs is fundamental to managing this tax exposure. The rules can be counterintuitive.

Assets Subject to U.S. Estate Tax:

• U.S. Real Estate: Any real property located within the United States.
• Tangible Personal Property: Physical items in the U.S., such as artwork, cars, jewelry, and even cash in a safe deposit box.
• Shares of U.S. Corporations: Stock in any company incorporated in the U.S., regardless of where the stock certificates are held.
• U.S. Investment Funds: Interests in U.S.-based mutual funds and ETFs.
• Certain Debt Obligations: Debts owed by a U.S. citizen, corporation, or governmental body.
• Interests in U.S. Partnerships: An interest in a partnership that conducts business in the U.S. may be a U.S. situs asset.

Assets Exempt from U.S. Estate Tax:

• Shares of Foreign Corporations: Stock in any company incorporated outside the U.S..
• U.S. Bank Deposits: Cash in a U.S. bank is specifically excluded, as long as the funds are not “effectively connected with a U.S. trade or business”.
• Certain Debt Instruments: Proceeds from U.S. government and corporate bonds that qualify for the “portfolio interest exemption” are not U.S. situs.
• Life Insurance Proceeds: The death benefit from a life insurance policy on an NRA is not subject to U.S. estate tax.

This starkly different treatment of U.S. stocks versus U.S. bank deposits is no accident. In fact, it reveals a deliberate instrument of U.S. economic policy. By exempting bank deposits and certain debt, the U.S. government encourages foreign capital into its banking system. Conversely, by taxing equity in U.S. corporations, the government captures a share of the value created by foreign investment in the American economy.

A Tale of Two Treaties: The Decisive Impact of Domicile

The default U.S. estate tax rules for non-resident aliens are severe. However, an estate and gift tax treaty between the United States and an NRA’s country of domicile can dramatically alter these rules. These treaties are powerful tools that can provide significant relief, but their application is highly specific. The presence or absence of a relevant treaty is often the single most important variable in determining the final tax liability.

The Turkish Problem: When an Income Tax Treaty Isn’t Enough

In Mr. Demir’s case, his status as a Turkish domiciliary is paramount. The United States and Turkey signed a bilateral treaty in 1996, which remains in force^. However, a careful reading reveals a critical limitation: it is a treaty for taxes on income.

This treaty’s provisions address taxes on income streams like dividends and interest. It contains no provisions related to estate, inheritance, or gift taxes. The official IRS list of countries with a U.S. estate and/or gift tax treaty includes only about 15 nations, and Turkey is not among them. The conclusion for Mr. Demir’s estate is therefore unavoidable and harsh: his heirs can claim no relief under the U.S.-Turkey treaty. They are fully subject to the default U.S. domestic law.

The Swiss Advantage: How a Treaty Changes Everything

To understand the profound impact of a treaty, consider a hypothetical scenario where Mr. Demir was a Swiss domiciliary. The United States does have an estate and inheritance tax treaty with Switzerland, signed in 1951. The primary benefit of this treaty is that it allows the estate of a qualifying Swiss domiciliary to use a pro-rata portion of the same large federal exemption available to U.S. citizens.

Calculating the Pro-Rata Exemption

The calculation is based on the ratio of the decedent’s U.S. situs assets to their total worldwide assets. The formula is as follows :

(Value of Worldwide EstateValue of U.S. Situs Assets​)×U.S. Exemption Amount=Treaty-Based Exemption

Let’s apply this to Mr. Demir’s situation, assuming he was a Swiss domiciliary with a total worldwide estate of $5 million:

$$ ( \frac{$500,000 \text{ (U.S. Stocks)}}{$5,000,000 \text{ (Worldwide Estate)}} ) \times $13,990,000 \text{ (2025 Exemption)} = $1,399,000 \text{ (Treaty-Based Exemption)} $$

In this scenario, the estate would be entitled to an exemption of nearly $1.4 million. Since this amount far exceeds the $500,000 value of the U.S. stocks, the taxable estate would be zero. A Swiss domiciliary in this exact financial position would owe no U.S. estate tax. This starkly illustrates that the decedent’s country of domicile can mean the difference between a six-figure tax bill and no tax at all.

The Unwelcome Inheritance: A Step-by-Step Guide for Heirs

For the heirs of an unprepared NRA like Mr. Demir, his death triggers a daunting, expensive, and time-consuming ordeal. They must navigate the complex requirements of both the foreign bank and the U.S. tax authorities to claim their inheritance.

Step 1: The Account Freeze

The first sign of trouble for Mr. Demir’s heirs will be the frozen Swiss bank account. The bank, as the custodian of U.S. securities, knows it cannot legally transfer these assets without authorization from the U.S. government. To protect itself from liability, the bank’s standard procedure is to freeze all access to the U.S. assets upon notification of the account holder’s death. The bank’s primary and non-negotiable demand will be for a

U.S. Federal Transfer Certificate, a document issued only by the IRS.

Step 2: Calculating the Tax Bill

Before the heirs can unfreeze the assets, they must first determine the U.S. estate tax liability. The estate calculates the tax based on the fair market value of the U.S. situs assets on the date of death. After subtracting the $60,000 exemption, the remaining “taxable estate” is subject to the progressive tax rates.

Table 2: Sample U.S. Estate Tax Calculation (The Demir Estate)

As the calculation shows, the estate faces a tax bill of $122,400—a staggering 24.5% of the total value of the U.S. assets.

Step 3: Filing Form 706-NA with the IRS

With the tax liability calculated, the estate’s executor must officially report this to the IRS by filing Form 706-NA, United States Estate (and Generation-Skipping Transfer) Tax Return. A filing is mandatory because the value of Mr. Demir’s U.S. assets ($500,000) far exceeds the $60,000 filing threshold. The deadline for filing is nine months from the date of death, though a six-month extension is available.

Critically, Form 706-NA requires the executor to disclose the value of the decedent’s entire worldwide estate. Although these non-U.S. assets are not subject to U.S. tax, this comprehensive disclosure is required for the IRS to verify the estate’s eligibility for certain deductions.

Step 4: Obtaining the Federal Transfer Certificate

After filing the return and paying the tax, the final step is to obtain the Federal Transfer Certificate (Form 5173). This certificate is the official “all-clear” from the IRS, confirming that all estate tax obligations have been satisfied. It is the key that finally unlocks the frozen assets.

The Catch-22 and the Liquidity Trap

The process of obtaining this certificate is notoriously slow, often taking nine to eighteen months or longer. During this prolonged period, the heirs’ inheritance remains illiquid and exposed to market fluctuations. This sequence creates a pernicious “liquidity trap.” The U.S. estate tax is due in cash just nine months after death. The most obvious source of funds is the U.S. stock portfolio itself. However, those assets are frozen by the bank, which will not release them until it receives the Transfer Certificate. The IRS, in turn, will not issue the certificate until the tax has been paid. This creates a classic Catch-22, forcing the family to find other funds to pay a U.S. tax bill just to unlock their own inheritance.

The Optimal Playbook: Proactive Strategies to Protect Your Legacy

Fortunately, you can avoid the severe consequences of the U.S. estate tax. For the well-advised foreign investor, the tax is largely optional. With proactive planning during the investor’s lifetime, you can completely and legally avoid the entire tax liability and the subsequent administrative nightmare.

Strategy 1: The Tax-Free Lifetime Gift

The most straightforward strategy lies in a remarkable asymmetry in the U.S. tax code. While the U.S. imposes estate tax on an NRA’s U.S. stocks at death, it explicitly exempts lifetime gifts of those same stocks from U.S. gift tax.

A Key Asymmetry in the Tax Code

The rule states that NRAs are subject to U.S. gift tax only on transfers of U.S.-situs real and tangible property. Gifts of intangible property by an NRA, such as stocks and bonds of U.S. corporations, are not subject to U.S. gift tax. The actionable advice is simple: Mr. Demir could have gifted his $500,000 portfolio of U.S. stocks directly to his heirs in Turkey at any point during his lifetime. This transaction would trigger zero U.S. gift tax. Consequently, upon his death, he would no longer own any U.S. situs assets, and his estate would owe zero U.S. estate tax.

Strategy 2: The Corporate “Blocker”

For investors who wish to retain control, a more structured approach is to use a “blocker” entity. This strategy involves establishing a non-U.S. corporation to own the U.S. securities. The NRA investor no longer directly owns U.S. situs assets. Instead, the investor owns shares in a foreign corporation, which in turn owns the U.S. stocks. Upon the investor’s death, the asset that passes to the heirs is the stock of the foreign corporation. Since shares of a non-U.S. company are not U.S. situs assets, they are not subject to the U.S. estate tax.

Advantages and Disadvantages of the Blocker

This strategy provides complete avoidance of the U.S. estate tax and allows the investor to retain control. However, it is not a do-it-yourself solution. It requires legal fees to establish and maintain the foreign corporation. Additionally, this strategy can create complex U.S. income tax problems if the heirs are, or ever become, U.S. persons, potentially triggering punitive reporting rules.

Strategy 3: The Foreign Irrevocable Trust

For high-net-worth individuals, the most robust planning tool is a properly structured foreign irrevocable trust. By transferring U.S. situs assets into such a trust, the investor makes a completed gift and permanently removes the assets from their personal estate for U.S. tax purposes. The trust then owns the assets for the benefit of the designated heirs. This is a sophisticated strategy that offers the greatest flexibility but also involves the highest setup and ongoing administration costs.

Conclusion: From Tax Trap to Tactical Plan

The U.S. estate tax system presents a formidable and often hidden trap for foreign nationals. The core risk is clear: a foreign investor from a non-treaty country like Turkey who directly owns more than $60,000 in U.S. stocks is unknowingly exposing their heirs to a substantial tax liability. This tax can claim up to 40% of the assets’ value and triggers a prolonged, frustrating administrative process with the IRS. The location of the brokerage account—whether in Zurich or Hong Kong—is completely irrelevant.

Yet, this outcome is entirely avoidable. The playbook for protecting one’s legacy is straightforward for those who act proactively.

• For most foreign investors, a program of lifetime gifting of U.S. stocks and ETFs is the simplest and most powerful solution. It legally removes the assets from the future estate, eliminating the tax liability entirely.
• For investors who require greater control or hold larger portfolios, establishing a foreign “blocker” corporation to hold the U.S. assets is the superior choice. It perfectly insulates the assets from the U.S. estate tax system.

The U.S. estate tax is a complex domain where the financial cost of inaction is enormous. The difference between a smooth, tax-free inheritance and a costly, bureaucratic nightmare lies in foresight and proactive planning. For any foreign national investing in the U.S. market, engaging with qualified international tax and legal counsel is not a luxury—it is an absolute necessity.

Disclaimer: This article is for general education purposes only and should not be considered as any type of tax or legal advice. We are not responsible for any loss that might occur from reading or using the content of this article.