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I am a non-resident alien holding a brokerage account in the USA but residing outside the USA. My country does not have an estate tax treaty with the USA. So my estate is liable for a significant estate tax up to 40%. Is there any way to avoid or to cover this tax? I thought of buying term insurance for myself, but I am not sure whether US companies will sell term insurance to a non-resident. I want to buy insurance from a US company because I want the death benefit to be in USD. Can someone suggest as to what the best way to approach this issue is?

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Beneficiaries don't pay estate tax in the US; the estate does. What the beneficiary gets is whatever is left of the estate after the estate tax has been paid from the assets of the estate. The executor of the estate might need to sell some of the stocks in the brokerage account to raise the cash to pay the estate tax, and the money/stocks or whatever is left in the brokerage account passes to the beneficiary free of any kind of (US) tax. Furthermore, as per US law, the basis of the stocks inherited by the beneficiary is the market value of the stocks as of the date of your death and so the beneficiary only needs to pay capital gains on the stock to the extent that the stock price increased during the time the beneficiary held the stock; all (unrealized) gains that occurred during the time that the deceased held the stock before death are "forgiven" since the estate paid estate taxes on these gains. Now, what all this means to the beneficiary if the beneficiary is also a nonresident of the US is a whole 'nuther matter. Finally, all the above is for brokerage accounts that are not held as IRA or 401(k) accounts.

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  • I came to know a while ago that one could set up a trust account to address the estate tax issue. But I don't know the details. – user2371765 Jun 20 '20 at 3:06
  • I corrected the question. Since the estate tax is on the account value and not on the capital gains (although its purpose could be only to tax unrealized gains) it is a huge amount for non-residents. My question was about how to minimize it or to cover it. When the account holder is alive, they are going to pay tax on the realized capital gains in their country. It is conceivable that if the unrealized capital gains at the time of death are small in proportion to the account not only the whole of them but also a significant chunk of the principal might be paid out in estate tax. – user2371765 Jun 20 '20 at 3:09
  • Also, how will the beneficiary keep track of the market value at the time of inheritance? It is just not practical. The statements will always report the actual basis. – user2371765 Jun 20 '20 at 3:11
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    The executor of the estate will inform the beneficiary of the valuation of the stocks as of the date of death. The beneficiary doesn't get to just take over the brokerage account (that is, it is not just a matter of substituting "Beneficiary Name" for "Owner's Name"on the brokerage website; it is more complicated than that). – Dilip Sarwate Jun 20 '20 at 3:13
  • No matter how large the unrealized capital gains are, a 40% estate tax will always ensure that the effective capital gains tax rate is at least 40%. Practically speaking, the latter will be way more than 40%. – user2371765 Jun 20 '20 at 3:35

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