Should Swiss investors worry about the U.S. Estate Tax in 2021?

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What does the U.S. Estate Tax mean for Swiss Investors?

Many people think that investing in the United States Exchanged Traded Funds (ETFs) is dangerous. They believe that because of the U.S. Estate Tax, they will lose a lot of money. This tax will heavily tax the assets of a decedent.

The U.S. estate tax means that your beneficiary will only get a portion of your estate when you decease. Because of that, many people recommend not to invest in American ETFs (or even stocks).

But is that even true? Not really! Indeed, many people forget about the U.S. Switzerland double taxation estate tax treaty.

In this article, we will study in detail the U.S. Estate Tax and the U.S. Estate Tax Treaty with Switzerland. And we are going to see what this really means for Swiss investors.

The U.S. Estate Tax

In the United States, when an estate is transferred from a deceased person, the beneficiary has to pay a tax on this estate.

This estate tax is a United States federal tax. It means it will apply everywhere in the United States. In addition to that, some states have added extra inheritance taxes. And some states have removed the estate tax. However, we will focus on the U.S. Federal Estate Tax since this is the one that matters for our case.

This U.S. Estate Tax law taxes inheritance at 40% of the value of the estate. It is a very significant estate tax. It is among the top estate taxes in the world.

For American citizens, estates of up to 11.18 million dollars are exempted from the U.S. Estate Tax. It means that most American investors do not care about this law. Very few investors have estates worth that much money.

However, this law also applies to non-resident aliens. It means it applies to everybody who invests in U.S. products. And unfortunately, the large exemption of 11.18 million dollars only applies to U.S. citizens.

Non-resident aliens only have an exemption of only up to 60’000 dollars. It means that if you have U.S. assets valued more than 60’000 dollars, you will have to pay this estate tax. You will not be paying this tax, but it will be the beneficiary of your estate, likely your spouse.

So this means that if you invest in a U.S. ETF, you will be subject to estate tax. In general, this means that if you have more than 60’000 USD in U.S. ETF, your beneficiaries will lose 40% of this value. It is a very significant tax. This loss could be terrible if your beneficiaries are depending on your portfolio.

Because of that, many people assume that they should not invest more than 60’000 in U.S. ETF. But this is not true in Switzerland!

The U.S. Estate Tax Treaties

The United States has many tax treaties with other countries in the world.

The United States has two kinds of tax treaties:

  • Income Tax Treaties
  • Estate Tax Treaties

For this current problem, we are only interested in estate tax treaties.

These treaties can change how citizens of other countries are taxed either on income or on the estate. In the case of estate tax treaties, these treaties generally provide better conditions for foreign citizens.

The United States has about 60 income tax treaties currently. But they only have 15 estate tax treaties. And fortunately for us, Switzerland is on the list. It means that this treaty must be taken into account if we want to consider the U.S. Estate Tax.

If you are interested, you can find the list of U.S. Estate Tax Treaties from the IRS. This list should be kept complete.

The U.S. Switzerland Estate Tax Treaty

In 1951, the United States and the Swiss confederation signed an estate tax treaty. To this day, this treaty is still valid. And this tax treaty is perfect for Swiss investors that have U.S. assets.

The official name of the tax treaty is “Convention between the Swiss Confederation and the United States of America for the avoidance of double taxation with respect to taxes on estates and inheritances”.

Let’s see what this means for Swiss investors. First, this treaty works both ways. There are some exemptions for Swiss people regarding U.S. taxes, and there are some exemptions for Americans regarding Swiss taxes. But here, we are only interested in exemptions for Swiss people.

The law article states that decedents citizens of Switzerland (or domiciled in Switzerland) have a right to a certain proportion of the same exemption that would apply to a United States citizen. We saw before that this exemption was 11.18 million dollars.

The critical part is the proportion. It is relatively easy to figure out. It is the proportion of U.S. assets in your entire net worth. You divide the value of your assets in the U.S. by your entire estate value, and you will get your proportion of U.S. assets. We are going to run some examples to make that clearer.

If you want all the details, you can read the original 1951 U.S. Swiss Estate Tax Treaty. It is a relatively short read. And I would say that for an official document, it is a straightforward document.

Examples

Let’s make a few examples to make it simpler:

  • The estate of the decedent is one million dollars with 200’000 dollars in U.S. assets and the rest in Swiss assets. The decedent has 20% of U.S. assets. It means he can get an exemption of up to 20% of 11.18 million, which is 2.236 million dollars. So, his beneficiaries will not pay any U.S. taxes.
  • The estate of the decedent is 2 million dollars, with 1.8 million dollars in U.S. assets. The decedent has 90% of U.S. assets. So, he can get an exemption of up to 90% of 11.18 million, which is 10.062 million. So there will not be any U.S. estate taxes.
  • The estate of the decedent is 25 million dollars, with 2 million dollars in U.S. assets. It means the decedent has 8% in U.S. assets. So, he can get an exemption of 8% of 11.18 million. This is an 894’400 USD exemption. His beneficiary will have to pay U.S. estate taxes on 1.1056 million dollars (2 million minus the exemption). His beneficiaries will pay about 442’240 USD.

As you can see, most investors will end up paying no U.S. Estate.

Let’s take a final example of my situation. Once I retire, my net worth should be about two million CHF. I expect to have a house for about 300’000 CHF, 100’000 CHF in cash, and the rest in my investment portfolio. And my portfolio is currently 80% in U.S. assets. So I will have 80% of 1.6 million CHF in U.S. assets. This 1.28 million CHF in U.S. assets. It is 64% of my entire estate.

So I will get an exemption of  7.1552 million dollars. It is much more than the value of my U.S. assets. So I do not expect to pay any U.S. Estate Tax.

Conclusion

For Swiss investors, the U.S. Estate Tax is of little concern! Switzerland and the United States have an excellent estate tax treaty.

This treaty says that Swiss investors can be treated like a U.S. citizen. It means that Swiss investors can get an extensive exemption. This exemption is still prorated based on the percentage of U.S. assets in your net worth at your death.

There are only very few cases where you would even pay this tax. It is only when you have a substantial net worth (we are talking more than 10M) and a small proportion of U.S. assets.

So, Swiss investors do not have to worry about investing in U.S. assets. United States ETFs are still the best ETFs available to Swiss investors.

If you are from another country in Europe, you can look out if your country has an estate tax treaty with the United States. If they have, you can try to find details about how this will impact you. If they do not, you will only be exempted up to 60’000 U.S. dollars. And you should probably avoid having more than that in U.S. assets.

Talking about U.S. ETFs, you may want to learn about why Swiss investors may lose access to them.

Mr. The Poor Swiss

Mr. The Poor Swiss is the author behind thepoorswiss.com. In 2017, he realized that he was falling into the trap of lifestyle inflation. He decided to cut on his expenses and increase his income. This blog is relating his story and findings. In 2019, he is saving more than 50% of his income. He made it a goal to reach Financial Independence. You can send Mr. The Poor Swiss a message here.

10 thoughts on “Should Swiss investors worry about the U.S. Estate Tax in 2021?”

  1. It’s probably worth noting that besides the actual tax there’s more effort involved.

    First the simple thing. As a CH citizen you can get back the full withholding amount by filling out and sending in the DA-1 form of the CH tax.

    Then for the inheritance, if you’re below 60k all is good, you will not have to do anything special. Above 60k you will have to go through the process of also filling out US taxes on inheritance, not just the “normal” Swiss taxes, even if in the end you will not have to pay to the US because you’re below the 11Mio. This might be more complicated as you will need to have valuations of all your assets (e.g. house) that will be accepted by the US not just the US assets.

    1. Hi Patrick,

      You are right, you won’t pay taxes, but you will still have to deal with U.S. Taxes. This is a good point. And it could be painful to do so.

      It’s correct about DA-1, but I think this has nothing to do with the estate tax treaty but with another treaty.

      Thanks for stopping by!

    2. Do you have any more info regarding the DA-1 form? Where do you need to send it to get back the remaining 15%?

  2. Thanks for that (and the blog in general which is great!).

    Maybe a silly question but if you own an Ireland domiciled ETF, listed in UK and tracking S&P (such as the Vanguard S&P 500 UCITS ETF – IE00B3XXRP09) would that qualify as US assets (since the underlying is US listed stocks) or is the domicile of the fund that counts.

    I understand that based on your summary it wouldn’t make a difference for a Swiss resident but as I may retire (thus also eventually die :P) in another jurisdiction this may be applicable to me.

    Thanks again!

    1. Hi Yiannis,

      No, that would not qualify as U.S. assets. You are not directly owning the assets, the Ireland provider is.
      So you are safe from a U.S. Estate point of view :)

      Thanks for stopping

  3. Thanks for the post, this is excellent news, I was only aware of the 60k rule.
    Btw, you’ve written 20% at the second example also, I suppose that should be 90%.

    1. Mathematically, it seems that as long as the total assets are below the base tax-exempt amount ($11.7m as of this year), the share of U.S. assets doesn’t really matter as the actual tax exemption will always be higher than the U.S. assets.

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