Understanding the U.S. estate tax system is critically important for anyone, especially the Vietnamese community, who owns assets or has ties in the United States. This complex regime comprises both federal rules and individual state laws, applying differently to U.S. citizens, lawful permanent residents (green-card holders), and nonresident aliens (NRAs). This article provides an overview of U.S. estate and inheritance taxes, their specific impact on Vietnamese individuals, and strategies to minimize tax liabilities.
Distinguishing Estate Tax vs. Inheritance Tax
To properly grasp U.S. transfer-tax rules, it’s essential to distinguish between the 2 main taxes on property received after death:
Estate Tax
- Nature: Levied on the total net value of the decedent’s estate before it is distributed to beneficiaries – i.e., a tax on the right to transfer assets.
- Who Pays: The estate itself, through its legal representative (executor or administrator). Beneficiaries do not pay directly.
- Jurisdiction: Federal government and certain states. A single estate may owe both federal and state estate taxes.
Inheritance Tax
- Nature: Levied on the portion of assets each beneficiary receives – i.e., a tax on the right to receive property.
- Who Pays: The beneficiary or heir.
- Jurisdiction: Only in five states as of 2025 (no federal inheritance tax). Rates and exemptions typically depend on the beneficiary’s relationship to the decedent (closer kinship ⇒ lower rates or exemptions).
| Criterion | Estate Tax |
Inheritance Tax |
| Taxpayer | The decedent’s estate | Each beneficiary |
| Level | Federal & select states | Only select states (none at the federal level) |
| Tax Base | Total net value of the estate | Value of assets received by each beneficiary |
| Affected by the relationship | N/A | Yes – closer relationships often receive exemptions/rates |
Federal U.S. Estate Tax Rules for 2025
Who Is Subject to Federal Estate Tax?
- U.S. Citizens: All worldwide assets, regardless of residency.
- Foreigners with U.S. “Domicile” at Death: Non-citizens deemed to have U.S. domicile (legal permanent home) at death – also taxed on worldwide assets.
Note on “Domicile” vs “Residency”: “Domicile” reflects intent to live permanently in the U.S., assessed by factors such as visa type, tax returns, wills, length of stay, green card status, property ownership, family ties, business activities, etc. Misclassification can trigger significant tax consequences and warrants specialized legal advice.
2025 Federal Exemption Amount
- Exemption: $13,990,000 per individual.
- Only the estate portion above this amount may owe federal estate tax (and must file Form 706).
Portability: A surviving U.S.-citizen spouse may elect to use any unused exemption of the deceased spouse (DSUE), provided Form 706 is timely filed, maximizing the couple’s combined exemption.
TCJA Sunset: The $13.99 million exemption arises from the 2017 Tax Cuts and Jobs Act (TCJA) and expires on December 31, 2025. Without new legislation, 2026 exemptions could drop to roughly $7 million per person, heightening the urgency for planning now.
Federal Estate Tax Rates
Progressive rates apply to the taxable estate portion above the exemption, beginning at 18% and rising to 40%.
| Taxable Estate Portion | Marginal Rate |
Tax Calculation |
| $1 – $10,000 | 18% | 18% of the amount |
| $10,001 – $20,000 | 20% | $1,800 + 20% of excess over $10,000 |
| $20,001 – $40,000 | 22% | $3,800 + 22% of excess over $20,000 |
| $40,001 – $60,000 | 24% | $8,200 + 24% of excess over $40,000 |
| $60,001 – $80,000 | 26% | $13,000 + 26% of excess over $60,000 |
| $80,001 – $100,000 | 28% | $18,200 + 28% of excess over $80,000 |
| $100,001 – $150,000 | 30% | $23,800 + 30% of excess over $100,000 |
| $150,001 – $250,000 | 32% | $38,800 + 32% of excess over $150,000 |
| $250,001 – $500,000 | 34% | $70,800 + 34% of excess over $250,000 |
| $500,001 – $750,000 | 37% | $155,800 + 37% of excess over $500,000 |
| $750,001 – $1,000,000 | 39% | $248,300 + 39% of excess over $750,000 |
| Over $1,000,000 | 40% | $345,800 + 40% of excess over $1,000,000 |
Deductions That Reduce Federal Estate Tax
- Marital Deduction: Unlimited deduction for transfers to a surviving U.S.-citizen spouse (defers tax until second death). Special QDOT rules apply if the spouse is not a U.S. citizen.
- Charitable Deduction: Qualifying charitable bequests are fully deductible.
- Other Deductions: Funeral expenses, estate administration costs, debts of the decedent, losses during estate administration.
Federal Gift Tax
Closely linked to the estate tax via the unified credit:
- Lifetime Exemption: $13.99 million (2025), shared between lifetime gifts and post-death transfers. Gifts exceeding the annual exclusion reduce this exemption.
- Annual Exclusion: $19,000 (2025) per donee, per donor – no gift tax and no reduction of lifetime exemption. Spouses may elect “gift splitting” to give $38,000 per donee (requires Form 709).
- Form 709: Required for any gifts to one individual exceeding $19,000 in a year, even if no tax is due, so that the IRS can track lifetime exemption usage.
- Special Rule for Non-Citizen Spouses: Annual exclusion limited to $190,000 (2025) for gifts from a U.S.-person spouse to a non-citizen spouse; excess gifts may incur gift tax.
State-Level Estate & Inheritance Taxes
States with Their Own Estate Tax (2025)
12 states + D.C.: CT, HI, IL, ME, MD, MA, MN, NY, OR, RI, VT, WA, and D.C. Exemptions are generally much lower than federal (e.g., OR $1 million; MA $2 million). Estates below the federal exemption may still owe state estate tax.
|
State / Area |
2025 Exemption |
Max Rate |
| Connecticut | $13,990,000 | 12% |
| Hawaii | $5,490,000 | 20% |
| Illinois | $4,000,000 | 16% |
| Maine | $7,000,000 | 12% |
| Maryland | $5,000,000 | 16% |
| Massachusetts | $2,000,000 | 16% |
| Minnesota | $3,000,000 | 16% |
| New York | $7,160,000 | 16% |
| Oregon | $1,000,000 | 16% |
| Rhode Island | $1,802,431 | 16% |
| Vermont | $5,000,000 | 16% |
| Washington | $2,193,000 | 20% |
| Washington, D.C. | $4,873,200 | 16% |
States with Inheritance Tax (as of 01/01/2025)
Five states: Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania (Iowa repealed its tax). Paid by beneficiaries; rates and exemptions depend on relationship to decedent (spouse usually exempt; immediate family often low rates/high exemptions; distant/non-related heirs highest rates).
Example: Pennsylvania
- Spouse: 0%
- Children/Parents: 4.5%
- Siblings: 12%
- Others: 15%
Example: Nebraska
- Spouse: Exempt
- Parents/Children/Siblings: $100,000 exemption; 1%
- Aunts/Uncles/Nieces/Nephews: $40,000 exemption; 11%
- Others: $25,000 exemption; 15%
Note: Maryland uniquely imposes both estate and inheritance taxes. Connecticut’s state exemption is tied to the federal exemption ($13.99M in 2025). State gift taxes are very rare – only Connecticut currently imposes one.
Estate Tax for Nonresident Aliens (NRAs)
Defining NRA Status
NRA for estate‐tax purposes = non-citizen and non-domiciled at death (distinct from income-tax residency). Determined by overall intent and factors, not merely visa or days present.
U.S. Situs Assets Subject to Tax
NRAs pay federal estate tax only on U.S.-situs assets, such as:
- Real estate located in the U.S.
- Tangible personal property in the U.S. (cash, vehicles, jewelry).
- Stock in U.S. corporations (wherever held).
- Obligations of U.S. persons (debt of U.S. individuals, corporations, government).
- Cash in U.S. brokerage accounts.
Excluded (non-situs) assets: U.S. bank deposits not in trade/business; life‐insurance proceeds on NRA lives; foreign corporate stock; assets outside the U.S.
NRA Exemption Amount
Only $60,000 (vs. $13.99 million for citizens/domiciled). Amounts above $60,000 are taxed up to 40%. The executor must file Form 706-NA if U.S.-situs assets exceed $60,000.
Gift Tax for NRAs
- Taxable only on gifts of tangible property located in the U.S. (e.g., U.S. real estate; physical U.S. cash).
- Intangible gifts (e.g., U.S. corporate stock, U.S. bank deposits) are excluded – opportunity for planning.
- Annual exclusion $19,000 (2025) for taxable gifts; no lifetime exemption for NRAs – gifts over $19,000 may incur immediate gift tax.
U.S. – Vietnam Tax Treaty & Impact
There is no bilateral estate or gift tax treaty between the U.S. and Vietnam. Therefore, Vietnamese NRAs follow default U.S. rules: $60,000 exemption; gift tax only on tangible U.S. property; no lifetime gift exemption.
Marital Deduction & QDOT for NRAs
- Spousal Deduction: Unlimited only if a surviving spouse is a U.S. citizen.
- QDOT (Qualified Domestic Trust): For non-citizen spouses to defer estate tax; tax is paid when principal is distributed or upon the surviving spouse’s death. Complex and requires expert setup/administration.
Guide to Reducing U.S. Estate Taxes
Take Advantage of Gift Exemptions (Annual & Lifetime)
- Annual Gift ($19,000/person): Gradually transfer assets without using up lifetime exemption.
- Larger Gifts (Before 2026): Consider using the current $13.99 million lifetime exemption before it potentially drops sharply, to “lock in” the higher exemption. The IRS confirms there will be no “clawback.”
- Strategies for NRAs (Non-Resident Aliens): Prioritize gifting U.S. intangible assets (e.g., U.S. company stocks) during life to avoid gift tax, instead of holding them and facing estate tax with only a $60,000 exemption.
Use of Trusts
- ILIT (Irrevocable Life Insurance Trust): Owns life insurance policies so that death benefits are excluded from the taxable estate and provides liquidity for tax payments.
- QDOT (Qualified Domestic Trust): Defers estate tax for non-U.S. citizen spouses.
- Other Types:
- Revocable Living Trust: Helps avoid probate but doesn’t reduce federal estate taxes.
- Charitable Trusts: Combine philanthropy with tax benefits.
Charitable Donations
Assets donated to qualified charities are deductible from the taxable U.S. estate.
Role of Life Insurance
- Estate Tax Exempt: Death benefits paid directly to beneficiaries are generally not subject to federal estate tax. Especially beneficial for NRAs, as it’s not considered a U.S. situs asset.
- Provides Liquidity: Helps pay estate taxes on time without needing to liquidate other assets.
- Use with ILIT: Ensures the insurance proceeds are excluded from the taxable estate.
Other Strategies
- Asset Ownership Structures for NRAs: Holding U.S. assets (e.g., real estate) through foreign entities may help avoid estate tax, though it raises income tax complexity and requires careful planning.
- Spend Down: Use up assets during lifetime.
FAQs
- What is the federal estate‐tax exemption for 2025, and does it apply to Vietnamese nationals?
- Citizens/Domiciled: $13,990,000 per person in 2025.
- Vietnamese NRAs: Only $60,000 exemption for U.S.-situs assets.
- I’m a Vietnamese citizen living abroad with U.S. property (real estate, stocks). Must I pay U.S. estate tax?
If you are an NRA, your U.S.-situs assets above $60,000 may be subject to federal estate tax (up to 40%). Form 706-NA is required if U.S. assets exceed $60,000.
- What’s the key difference between the estate tax and the inheritance tax in the U.S.?
- Estate Tax: Paid by the decedent’s estate on total assets (federal + some states).
- Inheritance Tax: Paid by beneficiaries on what they receive; only in a few states.
- How can I legally minimize or avoid U.S. estate tax?
Early estate planning: annual gifts, lifetime exemption use, trusts (ILIT, QDOT), charitable giving, life insurance, and proper ownership structuring. Professional advice is essential.
Conclusion
The U.S. estate tax system is highly complex, with varying rules at the federal and state levels, as well as differences between U.S. citizens/residents (those with domicile) and non-resident aliens (NRAs). For Vietnamese individuals who own assets in the U.S., understanding these regulations is critically important.
Key points include the high federal exemption amount ($13.99 million in 2025), which is expected to drop significantly after 2025 for citizens and domiciliaries, and the extremely low exemption ($60,000) for NRAs on U.S.-situs assets. The rules surrounding gift taxes, state-level taxes, and the absence of a U.S.-Vietnam estate/gift tax treaty further underscore the need for caution.
Given the complexity and frequent changes in the law, seeking professional advice from attorneys and financial advisors experienced in U.S. estate tax and international estate planning, especially those who understand the Vietnamese context, is essential. Early and proactive planning is the key to protecting wealth and securing the future for the next generation.
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