One of the biggest sleeper issues (in my opinion) for US companies when granting equity awards to non-US employees or other service providers is the fact that their heirs may be assessed with US estate tax and be required to file an estate tax return in the US if the individual dies while holding equity awards or shares.
US Estate Tax Exemptions
Individual US taxpayers (i.e., US citizens and non-US citizens who are domiciled in the US) can currently benefit from a significant estate tax exemption: no estate tax is due unless the value of the estate exceeds US$13,610,000 (this is the inflation-adjusted amount for 2024), reduced for taxable lifetime gifts, but doubled for married couples if both spouses’ estates qualify for the exemption. Accordingly, relatively few US estates currently are subject to estate tax. In any event, US employees and their heirs will most likely be well aware of possible estate tax consequences for their assets, including equity awards and shares acquired under a company share plan.
However, for non-US citizens who reside outside the US or who live in the US but are not domiciled in the US (“non-resident aliens”), an estate tax exemption applies only to a gross estate of up to US$60,000. The gross estate of a non-resident alien consists only of assets located in the US. Notwithstanding, even if the individual has no other assets in the US, if they die while holding shares (or equity awards over shares) in a US company which are valued at more than US$60,000, the heirs/estate will need to file an estate tax return in the US and pay applicable estate taxes. This can obviously come as a shock to many heirs who may have never set foot in the United States.
The United States has estate tax treaties/protocols with currently 15 countries,[1] a limited number of which may mitigate this outcome by not subjecting shares of stock of a US corporation held by a non-resident alien to US estate tax. For example, the estate tax treaties between Germany and the US, France and the US and the UK and the US include such a provision.
But with only 15 countries covered by estate tax treaties/provisions, and with only a small number of these treaties providing for the above exemption, this will leave many non-US individuals who can get caught by the US estate tax obligations.
US Situs Property
So-called US situs property is what will be taken into account to determine whether the US$60,000 threshold has been exceeded. US situs property includes real property located in the United States and other US-based assets, which includes shares in a US corporation, regardless of whether the share certificates are held in the United States. Additionally, equity awards over shares in a US company held by the decedent at death (and which are not forfeited upon death) are considered US situs property.
US Estate Tax Obligations
Unless an estate tax exemption applies, as noted, the executor of the estate is required to file an estate tax return and pay applicable estate taxes in the United States. How can the IRS force non-US heirs to comply with these obligations? The US Internal Revenue Code (in Section 2203) provides that the “executor” in cases where there is no executor or administrator within the United States will be the “person in actual or constructive possession of any property of the decedent.” If the awards or shares are held in a US brokerage account, this would make the US broker the executor, and accordingly, US brokers may not be willing to release the awards/shares until the non-US heirs have complied with their US estate tax obligations.
Strategies to Avoid US Estate Tax
Clearly, the most effective strategy is for individuals to liquidate their US situs property before their death, i.e., exercise any outstanding options and sell shares. Obviously, this is not entirely realistic, not only because some awards may vest upon death and shares are not issued until after the individual dies. Further, at least for current employees, this will be counter to the purpose of the company’s share plan which is to encourage employee share ownership.
Individuals could contemplate more sophisticated strategies such as transferring awards and shares into offshore trusts or corporations after they are issued, which may shield them from US estate tax if properly structured. This should be feasible in theory and permissible in most cases, but some exceptions could apply (e.g., employees in China are usually not permitted to transfer shares, to allow companies to comply with the PRC SAFE requirements). However, again, it may not be realistic for all individuals to pursue such an approach.
What Can Companies Do?
To be clear, the estate tax obligations rest with the individual and not the company. Companies do not have any legal obligation to mitigate US estate tax liabilities for their grantees. That said, it is highly recommended to at least provide some information to non-US grantees regarding these obligations and strongly encourage them to discuss these issues with a personal estate advisor. In practice, if a grantee dies, especially while in active service, it is very likely that the heirs will turn to the company to provide assistance with estate tax obligations and/or try to assert that the company should have mitigated these issues. In this case, being able to point to information previously provided on this topic can be very helpful.
Relatedly, companies should also take a close look at their beneficiary designations and likewise encourage grantees to carefully consider whom to designate as a beneficiary for the awards and/or shares.
Please contact your Compensation attorney if you would be interested in creating notifications or other training materials that can provide grantees with more information on the estate tax obligations as well as beneficiary designations and put them on the right path to further discuss these issues with a personal advisor.
I would like to thank my colleagues Glenn Fox and Paul DePasquale for their assistance with this blog post.
[1] The list of current countries with which the US has estate tax treaties is as follows: Australia, Austria, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, The Netherlands, South Africa, Switzerland and the United Kingdom. In addition, Canada and the US have estate tax provisions in their Income Tax Treaty.
