Proper planning when a foreigner considers the purchase United States real estate is essential because how title is taken determines whether the property will be subject to federal and state estate tax upon the death of foreign owner (hereinafter "FO"). This concern applies whether title is taken in an individual's sole name or jointly with another person including a spouse. In our law firm we often see new foreign clients who have already purchased United States real estate which has appreciated substantially in value. We also see surviving spouses or family members of a deceased FO for whom we must handle (1) filing federal and state estate tax returns, (2) payment of estate tax, and (3) if the decedent owned the property in individual name, an ancillary or initial probate administration. When the FO is still alive, there may be a number of viable options available to minimize or avoid the exposure to estate tax and probate. When the FO is already deceased, there are very limited options depending upon the circumstances.

According to the Internal Revenue Code, the estates of nonresident aliens (referred herein as 'foreigners') are subject to estate tax on their United States situs assets. Such assets include, but are not limited to, United States real property, stock in corporations and other entities formed in the United States , and interests in assets previously transferred if the foreign transferor has retained a right to beneficial enjoyment or income. While the estates of residents and citizens of the United States enjoy a current unified credit of US$2,000,000, unless the estate of the foreign decedent qualifies for different treatment under an applicable estate tax treaty, the exempt amount will only be US$60,000. United States assets left to a non-United States citizen surviving spouse will not qualify for the unlimited marital deduction unless they instead transferred to a qualified domestic trust ("QDOT"). Indebtedness represented by a mortgage on the real property will not be deductible in determining its taxable amount unless (1) the mortgage is nonrecourse - not very common, or (2) a proration of values of United States and. worldwide assets is taken to determine the applicable percentage of allowable deduction -- also not very common as most beneficiaries of many foreign decedents prefer to avoid disclosure of worldwide assets to the IRS.

While minimizing or avoiding exposure to estate tax is extremely important, current and future income tax consequences of alternatives must also be taken into account before deciding on the proper solution. With federal individual long term capital gains tax rates at only 15% compared to substantially higher federal corporate income tax rates (preferential capital gains tax rates do not apply to corporations), the knee-jerk reaction of placing title to all foreign-owned United States real property in the name of an offshore corporation in order to avoid potential estate tax may not always prove to be the best approach. State income taxes must also be considered.

1. Obtain an appraisal of the property to determine its current fair market value. If the property has not substantially appreciated in value, then a sale (with consideration actually changing hands and conventional closing costs paid) to a foreign corporation controlled by the FO or his family may avoid estate tax without a large current income tax. Merely transferring title to the foreign corporation without consideration will not only be deemed a taxable disposition but will also fail to avoid inclusion of the property for estate tax.

2. Consider purchasing life insurance on the life of the FO. The proceeds of life insurance on the life of a foreigner are not subject to estate tax and can provide liquidity to pay the estate tax.

3. If there is a surviving spouse, consider drafting a QDOT - either during the lifetime of the FO or upon his demise (we customarily draft United States situs property wills) - so as to at least avoid estate tax upon the death of the first spouse.

4. Review the family situation to see if there are family members who are United States taxpayers - such as adult children - who may more properly be the owners of the property perhaps subject to a mortgage in favor of the foreign parents.

5. Consider use of a two-tiered (foreign and domestic) partnership arrangement. A full discussion of this technique is beyond the scope of this article.

There are several other sophisticated techniques which we employ, a full discussion of which is beyond the scope of this article.

In summary, the well informed real estate professional should be sensitive to the existence of serious and costly tax consequences of how his foreign purchaser takes title to United States real property.