LETTER: Death and taxes

David Shapiro correctly identifies the maximum marginal rate of US estate tax for non-residents as 40%, and the maximum marginal rate of SA estate duty for local residents as 25% (“The unbearable anxieties of a US inheritance”, February 3).

He then draws the conclusion that “on death a local holder of US assets could be liable for the difference between the two rates”.  However, this conclusion does not quite take into account the manner in which the two taxes interplay with one another.

Take the case of a deceased SA resident whose entire estate, worth $10m at death, was invested in US shares. Assume first that the whole of the estate was left to his daughter. Death taxes based on situs take priority over death taxes based on the deceased’s circumstances, that is his residence or his domicile. Thus the estate’s first liability would be to US estate tax, which would amount to circa $4m. The ostensible liability to SA estate duty would be the rand equivalent of $2.5m, but this liability would be eliminated in its entirety by the credit the SA Revenue Service (Sars) would be obliged to give for the estate tax paid to the US Internal Revenue Service (IRS). Thus the IRS would receive the whole of the death taxes due by the deceased and Sars would receive nothing, a circumstance that will bring little joy to the SA tax authority. 

Now, instead assume the deceased left his entire estate to his wife. Again the US estate tax due would be $4m, as for a non-resident deceased no marital deduction is available for sums left to a surviving spouse. In SA though, a deduction from the value of the estate does apply for sums left to a surviving spouse.  Again, then, the total death duties would be $4m, and again the whole of this would be payable to the IRS, but the entirety of this tax could be eliminated if the deceased were to have restructured his portfolio before his death.

Thus if the deceased were to eliminate direct holdings of US shares from his portfolio he could reduce overall death taxes due, either by 15% of the value of those shares to the extent that he left that value to someone other than his wife, or by 40% of that value to the extent that he left that value to his wife. The savings could be enormous. All the deceased would have to do would be instead to invest that value in one or more non-US exchange traded funds, which would invest in US shares. 

Wilson McLeod
Claremont

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