Case 047Estate, succession and trustsCore

A resident Indian holds Rs 5 crore of US-listed shares directly. Explain her US estate tax exposure and compare holding the same exposure through an Indian fund.

The situation

Anjali Mirchandani, 58, lives in Pune and holds US-listed shares worth Rs 5 crore, about USD 602,410 at 83 rupees to the dollar, in a US brokerage account opened through an overseas investing platform. She bought them over the years for about Rs 3 crore. Her will leaves everything to her two children in India.

The US taxes the estates of people who are neither citizens nor residents on their US-situs assets, which include shares of US companies, above a small exemption. For this case, use an exemption of USD 60,000 and an illustrative average rate of 30% on the amount above it. Both figures, the graduated rate schedule and whether any treaty applies must be confirmed with a cross-border tax adviser.

Your task

What would her heirs face if she died holding the shares directly? How does holding through an Indian fund change that, and what does the switch cost?

Quick check

Why does holding through an Indian fund change the US estate tax picture?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

Held directly, about USD 542,410 sits above the exemption, and at an illustrative 30% her heirs could owe about Rs 1.35 crore before the shares pass to them. Through an Indian fund she owns Indian units, not US shares, so that exposure falls away. The switch costs about Rs 25.0 lakh of tax now at an illustrative rate, plus a higher yearly fee. A staged move, starting with new money and low-gain lots, is usually the sensible middle.

Step 1Why do US shares create a US estate problem for an Indian resident?

A family that owns a flat in another city may find that city's rules apply to the flat when the owner dies, wherever the family lives. The US taxes the estates of non-residents on assets sited in the US, and shares of US companies count, whatever country the owner lives in. The exemption for non-residents is small, so a Rs 5 crore holding is mostly exposed. There is also a practical cost: US brokerages usually need a US tax clearance before releasing the shares to heirs, which can take months.

Step 2How large is the exposure?

Convert and subtract. Rs 5 crore at 83 is about USD 602,410; less the USD 60,000 exemption, about USD 542,410 is exposed. At an illustrative 30% average rate, the tax is about USD 162,723, roughly Rs 1.35 crore, or 27% of the holding, owed before the children receive anything. The real schedule is graduated and must be checked, but the scale is the point: this is not a rounding error on a Rs 5 crore estate.

Same shares, two wrappers: what her heirs face, Rs croreHeld directly in a US accountHeld through an Indian fund5.00estate tax 1.35exposed above the exemptionexempt, USD 60,000US-situs: taxed in the US on her death5.00Indian fund units:no US estate taxCosts instead:fee about Rs 3.0 lakh a yearswitch tax about Rs 25.0 lakhIndian tax on the fund,rules to confirmIndian asset: the fund owns the shares
Held directly, Anjali's Rs 5 crore of US shares leave about USD 542,410 above the exemption and an illustrative estate tax of Rs 1.35 crore; held through an Indian fund, she owns Indian units and the exposure falls away, at the cost of a higher fee and tax on switching.
Step 3What does switching cost, and is it worth it?

Selling now crystallises the Rs 2 crore gain, about Rs 25.0 lakh of Indian tax at an illustrative 12.5%, and a fund may charge about 0.6 points a year more than holding shares directly, Rs 3.0 lakh a year. On an expected-value basis the switch looks expensive: at an illustrative 1-in-150 chance of death in a given year, the expected estate cost is about Rs 0.9 lakh a year. But estate planning is insurance against one event, and if that event happens the children face a Rs 1.35 crore bill and a frozen account.

So recommend the staged middle, with the limits stated. Stop adding to the direct account, route new money through the Indian fund, and move existing lots with the smallest gains first, so the direct holding shrinks towards the exemption over a few years. Other wrappers, such as funds domiciled outside the US, are also used for this, and life cover sized to the exposure can bridge the transition. The rules on Indian funds that invest abroad, and on their taxation, change often; confirm them before acting.

Where candidates lose it

Candidates focus on income tax and dividends and never mention estate tax, because India has none today. The interviewer built the case around the foreign rule that applies to Indian residents without their knowing it.

The second miss is quoting exemption and rate figures from memory as settled. Name the framework, show the scale with illustrative numbers, and send the client to confirm the current law.

What the interviewer asks next

  • Would holding the shares jointly with her daughter change the exposure?
  • How do funds domiciled outside the US, for example in Ireland, fit into this?
  • Anjali also holds a US bank deposit. Is that treated the same way?

Company names and figures are illustrative.