Indian investors venturing into the US stock market should be aware of a significant tax implication: the US estate tax. Samir Arora, the founder of Helios Capital, recently highlighted this often-overlooked risk, cautioning that it could substantially impact the inheritances of Indian residents holding US stocks directly.
Understanding the US Estate Tax
The US estate tax is levied on the assets of deceased individuals, including non-US residents, if those assets are located within the United States. This includes real estate, shares of US companies, and other tangible or intangible properties situated in the US.
For US citizens and green card holders, there's a generous estate tax exemption of $13.99 million in 2025. However, non-resident aliens (NRAs), including Indian residents, face a drastically lower exemption of just $60,000. This means that any US-situs assets exceeding this threshold could be subject to estate tax rates as high as 40%.
Impact on Indian Investors
With the increasing popularity of investing in US stocks among Indians, this tax has become a crucial consideration. Consider an Indian investor holding $200,000 worth of US stocks. If they pass away, their heirs could be liable for $56,000 in estate tax, leaving them with only $144,000. The absence of an estate tax treaty between India and the US further exacerbates the burden.
What Qualifies as a US-Situs Asset?
It's crucial to understand what the US Internal Revenue Service (IRS) considers a US-situs asset. Examples include:
- Real estate physically located in the US, such as houses or condos.
- Shares of companies traded on US stock exchanges.
- ETFs traded on US stock exchanges.
- Mutual funds domiciled in the US.
- Tangible personal property located in the U.S. such as artwork, jewelry, automobiles, or furniture.
Strategies to Mitigate US Estate Tax
While the US estate tax can pose a significant threat, several strategies can help mitigate its impact:
- Invest Through Foreign-Domiciled Funds: Investing through mutual funds or ETFs based in countries like Ireland or Luxembourg can help avoid US estate tax, as these aren't considered US assets.
- Gifting Assets: NRAs can gift tangible property, like real estate or art, up to $17,000 per recipient per year without incurring gift tax.
- Life Insurance: Purchasing a term life insurance policy in India can provide funds to cover potential estate tax liabilities.
- Estate Planning: Consulting with a qualified estate planning attorney to create a comprehensive plan tailored to your specific situation is crucial. This may involve establishing trusts or other legal structures to minimize tax exposure.
- Careful asset allocation: Consider diversifying investments to include assets not subject to US estate tax, such as real estate located outside the US or stocks in foreign corporations.
The Importance of Planning
Given the complexities of cross-border estate planning, seeking professional guidance is essential. A qualified financial advisor or estate planning attorney can help Indian investors navigate the intricacies of US tax laws and develop strategies to protect their assets and ensure their wealth is transferred to their heirs according to their wishes.
By understanding the risks and taking proactive steps, Indian investors can effectively manage their exposure to the US estate tax and safeguard their financial legacy.
