How to plan for US Estate Taxes for Returning Indians
- 23 hours ago
- 8 min read
If you are an Indian resident (whether you have returned from the US, are planning to), or have a child studying or living there you may be sitting on a huge financial risk you have never been formally told about.
The United States imposes an estate tax on assets held within its borders. For US citizens and those domiciled in the US, a generous exemption of $15 million applies in 2026. But for Indian citizens who are not domiciled in the US (which covers most returning NRIs and resident Indians with US investments), the exemption is a mere $60,000. Everything above that threshold is taxed at up to 40%.
This guide is written for Indian families who have one or more of the following situations:
Holdings in US stocks, US-domiciled ETFs, or US real estate
US retirement accounts such as 401(k) or IRA from a prior stint in the US
A child who is a US citizen or green card holder
A desire to fund a child’s education at an American university
Reyman Tips: If you are returning from the US, don't forget to reset your cost basis during the RNOR period to book tax free capital gains.
Contents: Part 1: Understanding US Estate Tax
Part 2: Four Strategies to Manage Estate Tax Exposure
If you need help with any of the following, feel free to contact us. Our team of experts will be happy to help you:
Investing and portfolio management
Spending optimization, EMIs & credit cards
Insurance advisory
Tax planning
Will & estate planning
Most other financial queries or challenges
You can also email us at help@reymanwealth.com
Note: This article is written from the perspective of a US resident returning/ returned to India. While some of the concepts may apply to people who have always resided in India and holding foreign assets, we'll do a separate article for that soon.
Part 1: Understanding US Estate Tax
What Is the US Estate Tax?
The US estate tax is a federal tax levied on the value of assets a person leaves behind at the time of their death.
Think of it as an inheritance tax applied before assets pass to the next generation.
For a US citizen, the estate tax only becomes relevant on estates worth more than $15 million (as of 2026). Below that threshold, there is no federal estate tax at all. This is a generous exemption that shields the vast majority of American families.
However, the rules are entirely different if you are an Indian resident who is not domiciled in the US.
The $60,000 Trap for Indian Residents
If you are an Indian resident, your estate tax exemption on US-situated assets is just $60,000 ie less than roughly ₹60 lakhs at current exchange rates. Any US assets above this amount are subject to estate tax at rates of up to 40%.
Example: If an Indian resident passes away holding $200,000 in US stocks, the taxable estate is $140,000 ($200,000 minus the $60,000 exemption). The estate tax owed could be approximately $50,000 to $56,000. This money must come from the estate before assets are passed to your children. |
What makes this particularly relevant for Indian families today is a combination of factors:
the explosion in direct investing in US markets through the Liberalised Remittance Scheme (LRS).
Indians working with foreign companies and holding RSUs/ ESPPs
returning Indians holding large US assets
Reyman Tips: Understand all the tax implications for holding foreign stocks in India here
Need help? Let’s talk.
Reyman Wealth helps returning Indians with planning their return to India, planning your RNOR period, resetting your cost basis and overall financial planning.
Who Does This Apply To?
The key concept here is domicile, which is different from tax residency or physical presence.
For US estate tax purposes, you are treated as a non domiciliary (and therefore subject to the $60,000 exemption) unless you are both physically present in the US and intend to remain there indefinitely.
This means the following individuals are almost certainly subject to the $60,000 rule:
Indian residents investing in US stocks via LRS
Indian residents working with foreign companies holding large RSU/ ESPP positions
Returning NRIs who have permanently moved back to India
Note that even holding a green card does not automatically make you a US domiciliary for estate tax purposes. The intent to remain permanently is what matters.
What Assets Are Subject to US Estate Tax?
The estate tax applies to ‘US situs assets’. These assets that are legally considered to be located within the United States. The following are generally treated as US-situs:
Asset Type | US-Situs? | Estate Tax Exposure |
US-listed stocks (e.g. Apple, Google) | Yes | High — full value included |
US domiciled ETFs (e.g. VOO, QQQ on NYSE) | Yes | High — full value included |
US real estate | Yes | High — full value included |
US bank accounts (cash deposits) | Generally No | Usually exempt |
Ireland domiciled UCITS ETFs | No | Not subject to US estate tax |
GIFT City (IFSC) funds | No | Not subject to US estate tax |
Indian mutual funds, stocks, real estate | No | Not subject to US estate tax |
No India-US Estate Tax Treaty
India and the United States have a Double Taxation Avoidance Agreement (DTAA), but this covers income tax only. There is no bilateral estate tax treaty between the two countries.
This is a critical point. Countries such as the UK, Germany, and Australia have estate tax treaties with the US that provide additional protections. India does not. Indian residents holding US assets are fully exposed to US estate tax rules with no treaty relief.
Part 2: Four Strategies to Manage Estate Tax Exposure
The good news is that there are well-established, legitimate strategies to reduce or eliminate US estate tax exposure for Indian residents.
Each strategy works differently, and the right approach depends on your specific situation, asset mix, and timeline.
Strategy 1: Term Insurance and the ILIT Structure
Term Insurance: One of the most straightforward ways to protect your heirs from an unexpected estate tax bill is to ensure sufficient liquidity is available to pay the tax. A term life insurance policy sized to cover the expected estate tax liability can serve this purpose.
How an ILIT Works
An Irrevocable Life Insurance Trust (ILIT) is a legal structure that owns the life insurance policy on your behalf.
When you pass away, the trust receives the insurance payout and can use those funds to pay the estate tax on your other US assets. Major benefit here is to avoid forcing your heirs to sell those investments in a rush.
Key Benefit: The ILIT effectively ‘insures’ your heirs against the estate tax bill, providing liquidity at exactly the moment it is needed. Your US investment portfolio can pass to the next generation intact. |
Practical Considerations
An ILIT is irrevocable — once set up, it cannot easily be undone
You make annual gifts to the trust to fund the insurance premiums (subject to gift tax rules)
The trust must send ‘Crummey notices’ to beneficiaries annually — a procedural requirement
This approach is best suited when you have significant, stable US asset holdings and want long-term coverage
Work with a US qualified estate planning attorney to set up the ILIT correctly
Strategy 2: Switching to Ireland-Domiciled UCITS ETFs
What Are UCITS ETFs?
UCITS stands for Undertakings for Collective Investment in Transferable Securities. This is a European fund regulatory framework.
Ireland domiciled UCITS ETFs are investment funds structured under Irish law that track the same indices as their US counterparts (such as the S&P 500, Nasdaq 100, or global equity indices).
The critical distinction is where the fund is legally domiciled. A Vanguard S&P 500 ETF listed on the New York Stock Exchange is a US-situs asset. An equivalent Vanguard S&P 500 UCITS ETF domiciled in Ireland is not a US-situs asset, even though it holds the same underlying US stocks.
Estate Tax Impact: Because Ireland domiciled UCITS ETFs are not US-situs assets, they are entirely outside the scope of US estate tax. You get the same broad market exposure without the estate tax risk. |
Additional Benefits for Indian Investors
Beyond estate tax protection, Irish ETFs offer another advantage related to withholding tax on dividends. Funds domiciled in Ireland benefit from the US-Ireland tax treaty, which reduces the dividend withholding tax from 30% (the default rate for non resident aliens) to 15%. This makes Irish ETFs more tax-efficient than their US equivalents for Indian investors.
For Indian residents who want growth without triggering annual dividend taxes, accumulating class Irish ETFs (which reinvest dividends internally rather than paying them out) are particularly efficient.
Important Timing Note
This strategy must be implemented carefully from a timing perspective. UCITS ETFs are classified as Passive Foreign Investment Companies (PFICs) under US tax law, which creates highly punitive tax treatment for US taxpayers. You must not hold these funds while you are still a US tax resident.
Reyman Tips: If you are an NRI returning to India, the RNOR (Resident but Not Ordinarily Resident) period (typically the first two to three years after return) is often the ideal window to restructure from US listed ETFs to Irish UCITS equivalents before your full Indian tax residency kicks in. More on this here.
Seems too complex? Don't worry, we can help
We work with returning Indians on a daily basis with exactly this sort of planning. Feel free to contact us and our team of experts will be happy to help.
Strategy 3: GIFT City (Gujarat International Finance Tec-City)
What Is GIFT City?
GIFT City is India’s first International Financial Services Centre (IFSC), located in Gujarat. From a regulatory standpoint, it is treated as a ‘foreign territory’ on Indian soil. It's essentially a financial free zone that allows investments in foreign currency denominated instruments.
Investments made through GIFT City’s IFSC are not US situs assets. They therefore fall entirely outside the scope of US estate tax.
Key Advantage: GIFT City allows Indian residents to invest in global equities (including US equity indices) — through India based structures that carry no US estate tax exposure. |
Caution for US-Based NRIs
If you are still a US tax resident (e.g., on an H-1B, L-1 visa, or green card), GIFT City funds may be subject to PFIC classification, creating complex US tax obligations. This strategy is most straightforward for fully India-resident individuals. Always confirm your US tax status with a qualified advisor before investing. |
Strategy 4: Gifting and Annual Exclusion Planning
This is the best solution for Returning Indians with US citizen children.
The US annual gift tax exclusion allows non US persons to gift up to $19,000 per recipient per year (2026) without triggering gift tax. A married couple can gift $38,000 per recipient per year.
This gets better:
Gift tax does not apply on gift of shares for Non Resident Aliens
Gift tax does not apply on gift of bank balance for Non Resident Aliens
The Strategy: If you have US citizen children, you can gift them shares, bank balance, without having to pay estate tax duty.
This requires extremely careful planning. There's nuances here to take care off:
Timing of the gift
Gifting assets mean they are out of your control and belong to the child
US tax reporting requirements will apply for gifts exceeding USD 100,000
Final Thoughts
The first aspect of dealing with estate tax is coming to terms with it. It's a tax that is not going away and the best thing to do is to plan around it.
Nobody likes thinking about their own death but as your financial advisors, it becomes our job to nudge you to proactively plan so the next generation can actually inherit the wealth that you have created.
There's a few more solutions that work here - 529 plans can be used with contributions from Indian residents, Indian jugaad solutions of joint holding or moving assets closer to death stage, etc. But we'll save these for another article some other day.
If you're a returning NRI who needs help with any of the following, feel free to reach out. Our team of experts is always happy to help:
Tax planning for return to India
Planning RNOR status in India and NRA status in USA
Assistance with cost basis reset - Capital gains calculation and reporting requirements
Assistance with redesignation of Indian bank accounts - NRO/ NRE to resident accounts (in line with FEMA regulations)
Comprehensive evaluation of holdings/ assets from tax perspective.
Financial planning and Investing
Spending optimization, EMIs & credit cards
Insurance advisory
ITR Filing in India
Will & estate planning
Most other financial queries or challenges
You can also email us at help@reymanwealth.com