READER QUESTION OF THE WEEK
YOUR MONEY: Nothing to tear your heir out over
It’s an open question whether the IRS has ever gone after anyone’s heirs in trying to enforce the US situs estate tax. So don’t lose any sleep over it
Question:
If you have an offshore trading account — for example in the US — what are the implications with regard to situs taxes, as well as capital gains and estate duty?
— Vanessa Callender-Easby
Answer:
The US situs tax (from the Latin for “site”) is difficult to understand — not technically, but in terms of why it exists at all. It’s an estate tax directed at foreigners with US assets worth more than $60,000 (about R1m at current rates).
Some context: only 0.2% of US citizens who died in 2021 paid estate tax, down from a historical level of 1% or 2%. In 2021 the thresholds at which tax would be levied were $11.7m for single filers and $23.4m for joint filers. In 2022 these thresholds were raised, to $12m and $24m. In 2023 they will jump to $12.9m and $25.8m. So, in rand terms, if you were a US single filer who died this year you would have to have an estate of R220m before you became liable (and several further exemptions apply).
Why would a situs death tax be applied against foreigners with a miserly $60,000 worth of assets, compared with $12.9m for US-registered taxpayers? It doesn’t make any sense at all.
Furthermore, considering the inconsequential number of deceased estates that pay estate taxes, it’s hardly likely that the Internal Revenue Service (IRS) devotes many resources to enforcing this tax.
Ask any major financial institution in South Africa what to do about situs taxes and it will more than likely force you to move your assets into a structure that it will administer at a small fee. This structure will save your heirs in case the IRS comes knocking at their doors. Remember, you will be dead. So it’s not your problem.
Yes, these financial institutions can be persuasive, but before you become beholden to them for life, ask if they can give you details of how many deceased estates have actually paid situs tax, and the amount collected. If they can, then by all means sign, but first please let us know the answer.
South Africa has a double taxation agreement with the US so whatever tax you had to pay in the US would be offset against what you pay in South Africa.
One last point — any capital gains would be paid locally. The gain is calculated in the foreign currency and converted at the average rate for the year. In other words, the gain is not calculated on the rand value of the gain, even if you moved the money out 10 years ago when the rand was, say, 10 to the dollar.
The above answer is from a financial services professional who asked not to be named
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