Estate Tax Blockers: Using Foreign Corporations to Shield US Assets

Foreign individuals holding US stocks or real estate directly expose those assets to US estate tax on death, subject to an exemption of just $60,000. One of the most established planning tools to address this exposure is the “estate tax blocker” using a foreign corporation to hold US assets so that the individual’s own estate no longer includes US-situs property. The structure is powerful, but it comes with meaningful trade-offs, particularly around double taxation and the mechanics of transferring already-owned assets into the blocker.

Key Takeaways

• US estate tax for non-US persons applies to US-situs assets — including US real estate and shares of US corporations — exceeding a $60,000 exemption.
• Shares of a foreign corporation are not US-situs assets, so holding US assets through a foreign corporate blocker removes them from the individual’s US taxable estate.
• The trade-off is double taxation: the foreign corporation pays tax on income received, and dividends to the individual are taxed again.
• US tax treaties can affect withholding rates differently for corporate versus individual investors.
• Transferring already-owned US assets into a blocker structure rather than acquiring assets through one from the outset triggers separate income and capital gains tax considerations that must be carefully modeled.

Introduction

For a foreign individual meaning someone who is neither a US citizen nor a US domiciliary US estate tax applies to US-situs assets exceeding just $60,000 in value at the time of death, at rates reaching 40%. Given how easily a modest US stock or real estate portfolio can exceed this threshold, foreign investors frequently look for structures that keep their US holdings outside the reach of this tax entirely. The estate tax blocker, built around a foreign corporation, is one of the most widely used tools for this purpose, and understanding both its mechanics and its costs is essential before implementing it.

What Counts as a US-Situs Asset?

US-situs assets typically include US real property, tangible personal property physically located in the United States, and shares of stock issued by a US corporation.[1] By contrast, shares of a foreign corporation are, by definition, not treated as US-situs assets — regardless of what assets that foreign corporation itself holds, even if its underlying portfolio consists entirely of US stocks or US real estate.

How the Estate Tax Blocker Works

This distinction is the foundation of the estate tax blocker strategy. Rather than holding US stocks or US real estate directly, a foreign individual instead holds those assets through a foreign corporation. On the individual’s death, their estate includes the shares of the foreign corporation not the underlying US assets themselves and because those shares are not US-situs property, no US estate tax arises on them at all. The structure is referred to as a “blocker” precisely because it blocks the US assets from being includible in the individual’s US taxable estate.

The Cost: Double Taxation

The estate tax blocker is not without cost, and the key drawback is double taxation of income. Income flowing from the underlying US assets whether dividends, interest, or rental income is first taxed at the level of the foreign corporation. When that corporation subsequently distributes profits (via dividends) to the individual shareholder, those dividends are taxed a second time in the hands of the individual. This two-layer taxation can materially reduce the after-tax yield on the underlying US assets compared to direct ownership, and must be weighed against the estate tax savings the structure achieves.

A related consideration is the impact of applicable US tax treaties, which frequently provide different withholding tax rates on US-source income depending on whether the recipient is a corporate investor or an individual investor. Because treaty rates can differ meaningfully between these two categories, the choice to interpose a corporate blocker can change the withholding tax outcome on ongoing income, independent of the double taxation concern described above — sometimes favorably, sometimes not, depending on the specific treaty and asset class involved.

The Harder Question: Transferring Assets Already Held Directly

The blocker strategy is comparatively straightforward to implement when a foreign individual is making a fresh investment and can simply acquire US assets through the foreign corporation from the outset. It becomes considerably more complex when the individual already owns US stocks or real estate directly and wishes to move those existing holdings into a blocker structure after the fact, since the transfer itself can trigger tax.

Illustration — Transferring Existing US Stock Holdings
Consider an Indian resident and citizen who already holds US stocks valued at $500,000 directly, and is therefore exposed to US estate tax risk on death. To mitigate this, the individual considers transferring the US stocks into an Indian private company to serve as a corporate blocker going forward. The tax treatment of this transfer depends on how it is structured:
Transfer as a gift to the Indian company: No US capital gains tax arises on the transfer, provided the individual is not present in the United States for more than 183 days in the current year. However, in India, the individual becomes subject to capital gains tax (at 12.5% or 20%, depending on whether the gain is short-term or long-term), and separately, the Indian company may face deemed income under Section 56(2)(x) of the Indian Income-tax Act, up to the fair market value of the US stocks received as a gift.

Transfer for consideration (at fair market value): Again, no US capital gains tax arises provided the 183-day US presence threshold is not exceeded in the current year. In India, the individual is subject to capital gains tax on the difference between the fair market value received and the original cost basis of the shares.

In either case, restructuring already-held US stock into a blocker generates an immediate Indian tax cost that must be weighed against the future US estate tax savings.

Real Estate Is Even More Complex

Where the underlying asset is US real estate rather than US stock, transferring it into a foreign corporate blocker is typically considerably more costly. Real property transfers can trigger US transfer taxes and property-level taxes at the state or local level, in addition to income tax consequences on the transfer itself, layering multiple additional cost categories onto the restructuring beyond what applies to a stock transfer.