Should Swiss investors worry about the U.S. Estate Tax in 2024?
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Many think 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 investing 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 detail the U.S. Estate Tax and the U.S. Estate Tax Treaty with Switzerland. And we see what this 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 in our case.
This U.S. Estate Tax law taxes inheritance at 40% of the estate’s value. It is a very significant estate tax. It is among the top estate taxes in the world.
For American citizens, estates of up to 12.92 million dollars (as of 2023) 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 12.92 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 at more than 60’000 dollars, you must 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 considered 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 concerning taxes on estates and inheritances”.
What does this mean 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 decedent 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 12.92 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 also 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 (in German). It is a relatively short read. And I would say that for an official document, it is a straightforward document.
Examples
We can give a few examples to make it simpler:
- The decedent’s estate 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 12.92 million, 2.584 million dollars. So, his beneficiaries will not pay any U.S. taxes.
- The decedent’s estate 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 12.92 million, which is 11.62 million. So, there will not be any U.S. estate taxes.
- The decedent’s estate 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 12.92 million. This is an 1.033 million USD exemption. His beneficiary must pay U.S. estate taxes on 0.966 million dollars (2 million minus the exemption). His beneficiaries will pay about 386’000 USD.
As you can see, most investors will end up paying no U.S. Estate.
We can 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 is 1.28 million CHF in U.S. assets. It is 64% of my entire estate.
So, I will get an exemption of 8.26 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.
The exemption may change in 2026
The current large exemption is partly due to a change in 2017, the Tax Cuts and Jobs Act (TCJA). This almost doubled the exemption at that time.
Unless there is a change by the US Congress, the exemption will go back to normal in 2026. This means we will go from about 13 million to about 7 million USD.
While this is a significant difference, this remains a huge exemption. So, I am not worried about this change. It is also entirely possible that there will be new tax changes until then.
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 U.S. citizens. 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 (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 European country, you can see 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.
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Your calculations look more complicated than they should be. Is your total estate larger than the US exemption? If yes, your US share will be subject to the tax, otherwise not.
Yes, that’s a good way to summarize the rule.
Hi Baptiste,
Out of curiosity, does this also concern ETFs invested in USD or any other currency for that matter in say SP500 with a European ISIN (such as IE or LU)?
Various sources (e.g. https://www.bogleheads.org/wiki/Non-US_investor%27s_guide_to_navigating_US_tax_traps) state that an ETF, mutual fund or similar that is incorporated outside the USA shields the owner from US estate tax on the underlying holdings.
Hi Max
No, what matters is the domicile of the fund. When you hold a EU fund with US stocks inside, you don’t own the stocks directly, but rather own a EU asset.
Unfortunately the link you gave to the treaty no longer works and the IRS only refers to the existence of estate tax treaties, but doesn’t provide the documents themselves. I’ve managed to track down the German original (with translations available in French and Italian):
https://fedlex.data.admin.ch/eli/cc/1952/645_661_663
I think it’s important to read and understand the treaty. Also, don’t forget to leave behind instructions, so that your estate executor knows to file a return with the IRS on time, otherwise the treaty is worthless.
US estate tax is a particularly nasty tool to rob foreign widows, widowers and orphans.
Thanks for letting me know, it seems indeed it has changed and I have not saved the PDF. I will update the link.
Dear Baptiste,
One needs to constantly monitor the evolution of tax legislation. For example, the existing inheritance tax exemption is due to be automatically reduced by 50% on 1 January 2026, unless Congress agrees to change that. So Swiss (or Swiss-domiciled) investors with total estate below the current exemption but above 50% of it may suddenly find themselves liable for US inheritence tax.
Hi Alex,
Excellent point. You are correct, the reduction will likely be divided by two in 2026, unless Congress changes that. I will add a note to the article.
Hi Baptiste.
For 2023, the exemption has been raised to $12.92M USD (i.e. roughly 11.50M CHF). See https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax
Your conclusion “It is only when you have a substantial net worth (more than 10M) and a small proportion of U.S. assets” is not completely correct. It should be “It’s only when your net worth is more than the exemption amount (12.92M USD / 11.50M CHF) and you hold any U.S. assets”. Whether it is 1% or 100%, it always qualifies.
It would be interesting to know how the US IRS computes the net worth of a person, I guess it may not be the same as the Swiss Tax Authorities.
Hi Patrik,
Thanks, I will update the numbers, they do change almost every year.
However, I disagree with your change of conclusion. We are only entitled to the exemption based on the percentage of our net worth made of US shares. If we only have 1% US shares, the exemption for these shares is only 115’000 CHF. I think the distinction is important for many people (although these people probably don’t read my blog).
I may have misunderstood the regulation…. this is how I interpret it.
The US tax is
(us shares – exemption) * 40%
(Net Worth * x% – 11.5M * x%) * 40%
(Net Worth – 11.5M) * x% * 40%
Per you example above, assuming 1% in US shares and an exemption of 115’000 CHF. I will have to pay US taxes when my US shares are worth 115’000 CHF or more and since they make up 1% of my wealth, it implies that my wealth must be 11’500’000 CHF or more.
Scenario 1. 10M CHF wealth and x% the US shares part, you will never have to pay:
US shares value: 10M * x%
Exemption: 11.5M * x%
It’s always 10M * x% 0
Scenario 2. 12M CHF wealth, you will always have to pay:
US shares value: 12M * x%
Exemption: 11.5M * x%
It’s always 12M * x% > 11.5M * x%
No, you are right, I interpret the same way. And now I get what you meant about the conclusion. You are right indeed. If you have a net worth even a tad lower than the exemption limit, you will never need to worry about, regardless of your allocation.
Hi Patrik & Baptiste,
great article, thanks a lot also for the recent updates. Following up on your comments. I think the examples in the article might require an update then?
While I believe the first 2 examples are correct that in those cases no estate tax would apply, to me it seems a bit misleading that it is due to the % of US assets. The main reason those 2 examples would not be subject to US estate tax is because they are below the threshold of 12.92M USD (as of 2023).
Moreover, I do not know how relevant it is but to my knowledge the threshold is for singles and double that for married couples.
Lastly, I think the US estate tax rate ranges from 18 to 40% but it rises quickly so once assets of >500k would be subject to US estate tax, a tax rate of close to 40% will already be reached.
Hi Donald,
Since the two examples say that it is exempt, I think I will keep them like this.
Yes, the threshold indeed doubles for couples. However, it gets complicated because the exemption from spouse A has to be passed to spouse B when he or she dies. So, the entire estate of spouse A has to be transferred to B, along with its exemption and this must be validated with an estate tax return.
Also, there is no mention of that in the the 1951 tax treaty, so I am not sure it applies.
Hello Baptist, thank you very much for this very informative blog.
My question to you is, what about Eu nationals living/ working in switzerland? Does this treaty aplies to them as well? And what is lets say I hold 1 milion before retiring and then move back to my country of origin within the european union? Does it change anything?
Iam afraid I invest while working in switzerland as european and then the treaty change also.
The second question is, does this treaty applies also to the second estate tax from some Us estates, ex. new york vs florida where this tax does not exist?
My third question is about gift tax treaties between ch- us? Can I gift my shares in life to my child and avoid this tax on my family if I die? Since Iam building the portfolio for them…
Thank you very much in advance for your reply…
Hi Kar
I believe this works the same for residents of Switzerland as long as they pay tax solely here. I mentionned in the article: “The law article states that decedent 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.”
It’s an estate tax at death. So what matters is where you die.
For your second question, I have no idea.
For your third question, I don’t think there is a treaty, but I think you only have to worry about the CH taxes, not US taxes for gifting while living, no?
Dear Baptiste, wow, your blog is a true treasure for Swiss investors!! Great thanks for all the time you put in perfectly explaining everything and answering every single question!
Thanks for your kind words, I am glad it’s useful :)
Thanks for informative article. Could you clarify if pension assets are counted when calculating total estate or it’s all assets excluding pension (2nd and 3rd pillar) ?
That’s a good question, and I am not sure. I would assume that they are counted since this after your death, and these assets should be counted. But don’t cite me on that.
Dear Baptiste,
If I decide to invest 100% into US ETF – VT, and my FIRE strategy is 3 million, at the age of 50. Would I be still exempt from tax? How much better would it be from investing just into a VWRL/VWCE european ETF, and not have to worry about any future changes on the tax treaty. I am not sure if it is worth all the worry.
Hi Alex,
It all depends on your proportion of US assets. If you have only these 3 million in USD, then your exemption is more than sufficient. Read again the three examples from the articles, they show well that the exemption is quite high.