Form 706-NA: The $60,000 Estate Tax Exemption Trap

A foreign investor buys a condominium in Miami, opens a brokerage account, buys $3 million of US index funds, and never spends more than a few weeks a year in the country. He assumes that because he is not a US tax resident, the United States has no claim on his estate. He is wrong by well over a million dollars. On the $3 million of fund shares alone the §2001(c) computation is $345,800 plus 40% of the $2,000,000 above $1,000,000, or $1,145,800, and the $13,000 credit leaves $1,132,800 due, with the Miami condominium taxed on top of that at a 40% marginal rate. A nonresident alien decedent gets a US estate tax exemption of $60,000 against US-situs assets, shares in a US mutual fund are US-situs assets, and the rate schedule on everything above the exemption climbs to 40%.

What Is the US Estate Tax Exemption for a Nonresident Alien?

It is $60,000 of US-situs assets, and it does not arrive as an exclusion at all. IRC §2102(b)(1) grants the estate of a nonresident who was not a US citizen a unified credit of $13,000. Because the rate schedule in §2001(c) starts at 18%, a $13,000 credit is exactly the tax on a $60,000 taxable estate. The commonly quoted "$60,000 exemption" is an exemption equivalent, and the distinction matters on the return, because Form 706-NA works from the credit, not from a subtraction.

Two consequences follow from the credit being a fixed dollar amount. First, it has never moved with inflation. The $13,000 has sat in §2102(b)(1) unchanged while the citizen exclusion was repeatedly raised. The 2025 budget reconciliation act made the citizen and domiciliary basic exclusion amount permanent at a substantially higher level beginning in 2026 and left §2102(b) untouched, so any source telling you the nonresident figure rises for 2026 is describing a provision that does not exist. Second, there is no portability. The deceased spousal unused exclusion under §2010(c)(4) is defined by reference to the basic exclusion amount, and a nonresident alien decedent has none to leave behind.

One narrow variation exists. Under §2102(b)(2), where the decedent is treated as a nonresident not a citizen under §2209, meaning a US citizen resident in a possession who acquired citizenship solely by reason of being a citizen of, or being born or resident in, that possession, the credit is the greater of $13,000 or the proportion of $46,800 that the US-situs gross estate bears to the entire gross estate.

How Is Estate Tax Domicile Different From the Substantial Presence Test?

They are different tests applied to different taxes, and confusing them is the most expensive error in this area. Income tax residency is mechanical: IRC §7701(b) counts days, weighting the current year at 100%, the first preceding year at one third, and the second preceding year at one sixth. Estate and gift tax residency is subjective: Treas. Reg. §20.0-1(b)(1) defines a resident as a decedent who at death had a domicile in the United States, and states that a person acquires a domicile in a place by living there, for even a brief period of time, with no definite present intention of later removing therefrom.

Domicile therefore turns on presence plus intent to remain indefinitely. One day of presence with the requisite intent establishes it. Twenty years of presence with a fixed intention to return home does not. The parallel gift tax definition in Treas. Reg. §25.2501-1(b) is worded the same way.

The practical result is that status splits. A foreign executive on assignment who meets the substantial presence test, files a Form 1040, and reports worldwide income, but who kept a home abroad, moved no family, and always intended to return, may still be domiciled abroad at death and file Form 706-NA. The reverse also happens: a retiree who has settled here permanently but limits days to stay under the substantial presence threshold can be an income tax nonresident and an estate tax domiciliary taxable on worldwide assets.

Because the test is factual, the IRS and the courts weigh indicators: visa category, where the spouse and minor children live, real property ownership, business ties, driver's license and voter registration, club and religious affiliations, the governing law of the will, and travel patterns over time. No single factor decides it. A green card is strong evidence of intent to remain indefinitely and usually supports domicile, but it is evidence, not a rule, and surrendering one does not conclusively end US domicile either.

Which Assets Count as US-Situs Property for Estate Tax?

IRC §2103 defines a nonresident alien's gross estate as the part of the worldwide gross estate that at death is situated in the United States, and §2104 supplies the affirmative situs rules. The heavyweight categories are US real property, tangible personal property physically located here, and stock of a domestic corporation.

Stock of a US corporation is the rule that surprises people. §2104(a) provides that shares owned and held by a nonresident not a citizen are deemed property within the United States only if issued by a domestic corporation. The test is the issuer, nothing else. The account can be at a Swiss private bank and the certificate can sit in a Singapore vault; the shares are still fully in the US estate. US-organized mutual fund shares follow the same rule. A temporary provision at §2105(d) once carved out the non-US-situs portion of a regulated investment company's assets, but by its terms it does not apply to estates of decedents dying after December 31, 2011.

Debt is more nuanced. §2104(c) makes debt obligations of a US person and of the United States, a state or political subdivision, or the District of Columbia US-situs, and separately reaches deposits with a US branch of a foreign corporation engaged in commercial banking. The relief valve is the subsection's last sentence: it does not apply to a debt obligation to which §2105(b) applies.

Which Assets Are Not US-Situs Property?

IRC §2105 is the exclusion statute, and it is short, specific, and enormously valuable. Three exclusions do most of the work.

Life insurance on the nonresident's own life. §2105(a) provides that the amount receivable as insurance on the life of a nonresident not a citizen is not deemed property within the United States. The insurer can be a US company and the policy dollar-denominated, and the proceeds still sit outside the US estate. That makes life insurance the cleanest liquidity vehicle for a nonresident who wants to keep US real estate in the family: the policy funds the estate tax without itself being taxed.

Bank deposits whose interest would be tax-exempt. §2105(b)(1) excludes amounts described in §871(i)(3) if interest on them would not be taxable under §871(i)(1) were it received by the decedent at death. Those categories are deposits with persons carrying on the banking business, deposits or withdrawable accounts with savings institutions, and amounts held by an insurance company under an agreement to pay interest, with the exemption turning on the interest not being effectively connected with a US trade or business. So a nonresident can hold a very large balance in an ordinary US bank account and pass it free of estate tax, while the identical sum in US shares at the same institution is fully taxable.

Portfolio-interest debt obligations. §2105(b)(3) excludes a debt obligation if, without regard to whether a §871(h)(5) statement has been received, interest on it would be eligible for the §871(h)(1) portfolio interest exemption were it received by the decedent at death. Because most registered US corporate and Treasury debt is portfolio-interest eligible, this swallows much of what §2104(c) would otherwise reach.

Two further exclusions round out the section. §2105(b)(2) covers deposits with a foreign branch of a domestic corporation or partnership engaged in commercial banking, and §2105(b)(4) covers obligations that would be original issue discount obligations under §871(g)(1) but for subparagraph (B)(i), where the interest would not be effectively connected. Separately, §2105(c) removes works of art imported solely for exhibition and loaned to a qualifying public gallery or museum, provided they are on exhibition or in transit at death.

The foreign-corporation line is the fulcrum of inbound planning. Stock of a non-US corporation appears nowhere in §2104, so it is not US-situs even if the corporation's only asset is an apartment building in Manhattan. The structure is not free: the corporation faces US income tax on effectively connected income, FIRPTA on disposition, and potentially the §884 branch profits tax, with no basis step-up in the underlying property at death. The estate tax saving and the income tax cost have to be modeled against each other, not assumed.

Everything in this section assumes the decedent was not a covered expatriate. If the decedent was a covered expatriate under §877A, these exclusions can boomerang onto the heirs. §2801(e)(1) reaches any property a US person acquires by reason of the death of a covered expatriate, with no situs limitation, and §2801(e)(2) spares only property that was included in the gross estate and reported on a timely Form 706-NA. Life insurance on the decedent's own life, a qualifying US bank deposit, and portfolio-interest debt are by definition not on that return, because §2105 keeps them out of the estate, so a US child who inherits them owes the flat 40% §2801 tax on Form 708. For a covered expatriate, the assets that look safest for estate tax are the ones that expose the recipient.

When Is Form 706-NA Due and What Is the Filing Threshold?

Form 706-NA is due nine months after the date of death. The estate gets an automatic six-month extension of time to file by submitting Form 4768 on or before that original due date, and an executor outside the United States may be able to request more. An extension of time to file is not an extension of time to pay: interest runs from the original nine-month date on unpaid tax, and an extension to pay is a separate request granted only on a showing of reasonable cause.

The threshold is lower than most executors expect. Per the Instructions for Form 706-NA (Rev. September 2025), a return is required when the date of death value of the decedent's US-situated assets, together with the gift tax specific exemption and the amount of adjusted taxable gifts, exceeds $60,000. The specific exemption covers gifts made from September 9 through December 31, 1976; adjusted taxable gifts are gifts made after December 31, 1976. Note the measure: it is the gross value of the US assets, not the taxable estate after deductions, so a US property worth $700,000 carrying a $650,000 mortgage still triggers a filing.

Deductions are prorated and conditioned on worldwide disclosure. IRC §2106(a)(1) allows the §2053 and §2054 deductions for funeral and administration expenses, claims, and casualty losses only in the proportion the US-situs portion of the gross estate bears to the entire gross estate wherever situated. §2106(b) then makes it unavoidable: no deduction is allowed under (a)(1) or (a)(2) unless the executor includes in the return the value at death of the part of the gross estate not situated in the United States. An executor who keeps foreign assets out of view is choosing to forgo deductions. The §2106(a)(2) charitable deduction is separately limited, generally to the United States or a state, or to domestic corporations organized exclusively for religious, charitable, scientific, literary, or educational purposes.

Collection has a chokepoint. A US bank, broker, or transfer agent holding a deceased nonresident's assets will typically refuse to release them without a transfer certificate (Form 5173) confirming the estate tax has been discharged or provided for, which the IRS issues only once satisfied on that point, in practice after the return is filed and processed. One carve-out matters: no transfer certificate is required for property administered by an executor or administrator appointed, qualified, and acting within the United States, which is why opening a domestic ancillary administration is sometimes worth the cost. Heirs who assume a death certificate will unlock the account are usually the ones who discover the filing obligation long after month nine.

How Do Estate Tax Treaties Change the Result?

An applicable treaty can override the domestic situs rules and, in most cases, replace the $13,000 credit with a far larger prorated one. The IRS estate and gift tax treaty page identifies Australia, Austria, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, South Africa, Switzerland, and the United Kingdom, with Canada's relief delivered through the estate tax article of the income tax treaty rather than a standalone transfer tax convention. If the decedent's country of domicile is not covered, there is no treaty relief, full stop. That single fact determines more outcomes than any planning technique.

The treaties fall into two generations. Situs-type treaties, the older pattern, reallocate taxing rights over specific categories of property and supply a credit mechanism for the double tax that remains. Domicile-type treaties, the modern pattern, first fix a single domicile under a tie-breaker article, then generally let the non-domicile country tax only real property and permanent establishment assets, leaving everything else to the domicile country. The second pattern is usually far better for a decedent holding a US securities portfolio.

The most valuable common feature is the prorated unified credit, and the Code supplies the machinery. IRC §2102(b)(3)(A) provides that, to the extent required under any treaty obligation of the United States, the credit shall equal the amount bearing the same ratio to the applicable credit amount in effect under §2010(c) for the calendar year of death as the US-situs portion of the gross estate bears to the entire gross estate wherever situated. That is a direct statutory bridge from $13,000 to a share of the citizen's credit, routinely many multiples of it. Treaties also frequently extend a marital deduction or credit where §2056(d) would otherwise deny one.

Claiming a treaty position is not passive. It is disclosed on Form 706-NA with a statement identifying the treaty and articles relied on, a treaty-based return position implicates the §6114 disclosure rules, and nearly every relief formula is a ratio with the worldwide estate in the denominator, so the estate must reveal worldwide values to use it.

Can a Nonresident's Estate Claim the Marital Deduction?

Only through a qualified domestic trust. IRC §2056(d)(1) denies the marital deduction outright for property passing to a surviving spouse who is not a US citizen, whatever the decedent's own status. The policy is simple: the marital deduction defers rather than forgives, and a non-citizen spouse could leave the country with the property before the deferred tax is ever collected.

IRC §2056A restores the deduction where the property passes to a QDOT. The core requirements are that the instrument require at least one trustee to be a US citizen or domestic corporation, that no distribution of corpus be made unless that US trustee has the right to withhold the §2056A estate tax, that the trust meet the regulatory requirements ensuring collection, and that the executor make an irrevocable QDOT election on the return. Treas. Reg. §20.2056A-2(d) then adds collection security, and every QDOT has to satisfy it. Where the fair market value of the trust assets exceeds $2 million, the trust must have a US bank as trustee or furnish a bond or letter of credit equal to 65% of that value. Where the value is $2 million or less, the instrument is not excused: §20.2056A-2(d)(1)(ii) requires it to provide either that no more than 35% of the fair market value of the trust assets, determined annually on the last day of the trust's taxable year, will consist of real property located outside the United States, or that the trust will meet those same US-bank-trustee, bond, or letter of credit requirements. A drafter who assumes a $1.5 million QDOT needs no such provision omits a mandatory term and puts the election at risk. In testing against the $2 million threshold, §20.2056A-2(d)(1)(iv) lets the executor elect to exclude up to $600,000 attributable to real property and related furnishings owned directly by the QDOT and used by the surviving spouse as a personal residence.

What a QDOT buys is timing, not forgiveness. Income distributions to the surviving spouse escape the §2056A tax. Principal distributions during the spouse's life trigger the deferred estate tax at the decedent's marginal rate unless they meet the regulatory hardship exception for an immediate and substantial need relating to health, maintenance, education, or support where other resources are not reasonably available. The remaining balance at the spouse's death is taxed. And naturalization ends the regime: if the surviving spouse becomes a US citizen and any one of the three alternative conditions in §2056A(b)(12) is met, the QDOT tax stops applying. Those alternatives are that the spouse was a US resident at all times between the decedent's death and naturalization, or that no §2056A(b)(1)(A) tax was imposed on any distribution before naturalization, or that the spouse elects to treat prior taxable distributions as taxable gifts and the related §2010 credit reductions as §2505 credits against gift tax. Only the first is a residency test, so a spouse who spent years abroad is not automatically shut out, which turns citizenship timing into a real planning variable.

Lifetime transfers follow the same logic. The unlimited marital deduction is unavailable for gifts to a non-citizen spouse, but §2523(i)(2) substitutes an enlarged annual exclusion many multiples of the ordinary one. That figure is inflation-adjusted and republished annually, so confirm the amount in the IRS revenue procedure for the year of the gift rather than reusing a prior year's number.

Why Does the Gift Tax Treat US Stock Differently?

Because IRC §2501(a)(2) says so: the gift tax does not apply to the transfer of intangible property by a nonresident not a citizen of the United States. Stock is intangible property. The result is a structural asymmetry rather than a loophole. The same shares of a US corporation are fully estate-taxable at death under §2104(a) and entirely outside the gift tax if given away during life. Read that literally, though: outside the gift tax is not the same as untaxed, because §2801 imposes a separate tax on the recipient when the donor is a covered expatriate, covered below.

What remains gift-taxable for a nonresident donor is narrow, and that narrowness is the combined effect of two provisions, not one. §2511(a) is a pure situs limitation: it applies the gift tax whether the transfer is in trust or otherwise and whether the property is real or personal, tangible or intangible, but in the case of a nonresident not a citizen it applies "to a transfer only if the property is situated within the United States." §2501(a)(2) then lifts intangibles out of that base. What is left is US real property and tangible personal property located here: US real estate, artwork and jewelry physically present, and, importantly, US currency held in the United States, long treated as tangible personal property for gift tax purposes. Writing a check on a US bank account is a very different transaction from transferring the shares in the account next door, and clients routinely get this backward.

The anti-abuse rule most sources still cite for this area has been dead for years. The Code does still contain §2501(a)(3), which turns off the intangibles exclusion for a donor subject to the §877(b) alternative tax, along with §2501(a)(5) for certain foreign corporate stock and §2511(b), the companion situs rule that deems US corporate shares and US-obligor debt to be situated in the United States for a donor so excepted. But §877(h) provides that §877 "shall not apply to any individual whose expatriation date (as defined in section 877A(g)(3)) is on or after the date of the enactment of this subsection," which is June 17, 2008. Because §877(b) ran only for the ten years following expatriation, the last year any donor could still be subject to it was roughly 2018. §2501(a)(3) now reaches only pre-June-17-2008 expatriations inside a window that has since closed.

The operative modern regime is §877A plus §2801, and §2801 lands on the recipient. Where the donor is a covered expatriate under §877A, §2801 imposes tax on any covered gift or bequest at the highest rate specified in the §2001(c) table, currently 40%, and §2801(b) provides that the tax "shall be paid by the person receiving such gift or bequest." The section has no situs limitation: US and foreign intangibles alike are caught, which is precisely how it forecloses the §2501(a)(2) route. It applies where the recipient is a US citizen or resident, a domestic trust, or an electing foreign trust, and §2801(c) exempts only the amount up to the §2503(b) annual exclusion for the calendar year. Final regulations T.D. 10027 (90 FR 3319, January 14, 2025) apply to covered gifts and bequests received on or after January 1, 2025, and the recipient reports and pays on Form 708, due on or before the fifteenth day of the eighteenth calendar month following the close of the calendar year of receipt. So before recommending a lifetime transfer, establish whether the donor expatriated as a covered expatriate. If so, the children pay 40%.

The asymmetry produces the clearest planning conclusion in the area, subject to one gate that has to be cleared first. A nonresident who is not a covered expatriate and who intends to pass a US securities portfolio to children can transfer the shares during life with no US gift tax and remove them from the US estate permanently. The US transfer tax cost of that gift is zero, while holding the same shares until death costs up to 40% of everything over $60,000. If the donor is a covered expatriate under §877A, the conclusion inverts: the gift remains outside the gift tax, but §2801 taxes the US recipient at 40% on everything above the annual exclusion. Death is the cheaper path here, because holding the shares until death runs them through Form 706-NA, where the $60,000 exemption equivalent and the graduated §2001(c) brackets apply and §2801(e)(2) then excludes what that return already reported. The lifetime gift trades all of that for a flat 40% the children, not the donor, owe.

The remaining constraints are real and mostly non-tax: the donor gives up control and cash flow, the transfer may be taxable in the home country, and the recipient takes a carryover basis with no step-up. A US-person recipient also files Form 3520 above the annual threshold for gifts from foreign persons, but note what that form is and is not. Form 3520 is an information return carrying its own penalties for nonfiling; it is not the operative liability. Where §2801 applies, the liability is computed, reported, and paid on Form 708, and filing Form 3520 does nothing to satisfy it. The mirror image of all this is that a nonresident should not casually gift US real property or tangible assets, because those transfers are fully taxable with no lifetime credit to absorb them.

Bottom Line

The nonresident alien estate tax is severe precisely because it stays invisible until death. Whether a decedent lands in that regime or the far more generous one for US domiciliaries turns on domicile, the subjective intent test of Treas. Reg. §20.0-1(b)(1), which has nothing to do with the substantial presence day count. Inside the regime, situs drives everything: §2104(a) pulls in US stock wherever it is held, while §2105 pushes out life insurance on the decedent's own life, most US bank deposits, and portfolio-interest debt. §2106 prorates deductions and conditions them on worldwide disclosure. A treaty, where one exists, replaces the $13,000 credit with a prorated share of the §2010(c) credit. A non-citizen surviving spouse gets nothing under §2056(d) without a §2056A QDOT, and that QDOT needs a security provision at every size, not only above $2 million. And §2501(a)(2) means the most effective response, moving US shares during life, carries no US gift tax, with one hard gate in front of it: if the donor is a covered expatriate under §877A, §2801 taxes the covered gift at 40% and makes the US recipient pay it on Form 708, with no situs limitation and no help from Form 3520. The old §2501(a)(3) answer that most sources still give has been inoperative since §877(h) shut §877 off for expatriations on or after June 17, 2008. Check expatriation status before you check anything else.

If you are a nonresident holding US real estate, US securities, or a US business interest, or you are administering the estate of one, our international tax and cross-border tax teams analyze situs asset by asset, evaluate treaty positions, and prepare Form 706-NA and the transfer certificate package. Have questions about US estate tax exposure as a nonresident alien? Contact TS CPA for a free consultation. We respond within the same day.

Official IRS and Government Sources

• IRS About Form 706-NA
• IRS Instructions for Form 706-NA
• IRS: Estate Tax for Nonresidents Not Citizens of the United States
• IRS: Estate and Gift Tax Treaties
• IRS: Transfer Certificate Filing Requirements for the Estates of Nonresidents Not Citizens of the United States
• IRC Section 2101, Tax Imposed on Estates of Nonresidents Not Citizens
• IRC Section 2102, Credits Against Tax
• IRC Section 2104, Property Within the United States
• IRC Section 2105, Property Without the United States
• IRC Section 2106, Taxable Estate
• IRC Section 2056A, Qualified Domestic Trust
• IRC Section 2501, Imposition of Gift Tax
• IRC Section 2511, Transfers in General
• IRC Section 2801, Imposition of Tax on Gifts and Bequests From Covered Expatriates
• IRC Section 877, Expatriation to Avoid Tax, Including the Subsection (h) Termination
• Treasury Regulation 28.2801-1, Tax on Certain Gifts and Bequests From Covered Expatriates
• Federal Register: Gifts and Bequests From Covered Expatriates, T.D. 10027, 90 FR 3319
• IRC Section 2209, Certain Residents of Possessions Considered Nonresidents Not Citizens
• Treasury Regulation 20.0-1, Definition of Resident for Estate Tax
• Treasury Regulation 20.2056A-2, Requirements for Qualified Domestic Trust