This article originally appeared in the Tax Management International Tax Journal - Bloomberg Tax as "Americans Living Overseas Need Cross-Border Estate Planning."
Estate and inheritance taxes are critical considerations for all US citizens living abroad, whether they are building wealth, managing significant assets, or planning to transfer wealth to future generations. Understanding the nuances of estate and inheritance taxes for US citizens managing wealth across borders is necessary for strategizing an effective estate plan. While the US offers high estate tax exemptions, future reductions in taxation thresholds and differing rules across Europe highlight the need for proactive planning. This article provides an overview of US estate tax, state-level taxes, and European inheritance tax, with a focus on Germany, to provide a clearer understanding of these topics.
At a baseline, understanding federal estate tax and its interplay with state-level taxes is crucial for developing a tax-efficient plan for the distribution and continued accumulation of one’s financial legacy.
Adding to this complexity, US citizens residing abroad, particularly in Europe, must develop a globally efficient plan to successfully navigate inheritance tax systems that differ significantly from the American model.
US Federal Estate Tax Overview
The US estate tax is a federal tax levied on the transfer of a deceased person’s assets to their heirs. Unlike inheritance tax, which is paid by the recipient, estate tax is calculated on the value of the deceased’s estate before distribution and paid by the estate.
The current 2025 federal estate tax exemption stands at $13.99 million per individual ($27.98 million for married couples filing jointly). (1)
Estates valued below the 2025 threshold are not subject to federal estate tax.
The current federal estate tax exemption is set to expire at the end of 2025 with the sunset of the TCJA provisions. However, given the recent election of President Trump, it is anticipated that the exemption may remain at elevated levels beyond 2025. (2)
Estates exceeding the federal exemption are taxed at rates up to 40%. Although most estates fall below the taxable threshold, high-net-worth individuals must implement strategic estate planning to minimize potential liabilities. Key strategies include lifetime gifting, charitable donations, and the use of trusts to shelter assets from taxation.
US State Estate and Inheritance Taxes
In addition to federal estate tax, several states impose their own estate taxes, which often have lower exemption thresholds than the federal limit.
For example, Oregon, Rhode Island and Massachusetts have the lowest estate exclusions at $2 million or less, significantly increasing the number of estates subject to taxation in those states. (3)
The threshold triggering New York estate tax sits at $7.16 million in 2025, but the state applies a “cliff” tax that can result in steep liabilities if an estate value slightly exceeds the exemption.
State estate tax rates vary but typically range from 0.8% to 20%. (4) These taxes can apply in addition to federal estate tax, potentially creating a sizable tax burden. Residents in states with estate taxes should incorporate state-level considerations into their estate planning.
What states have estate tax? In 2025, the following states and jurisdictions levy estate taxes on qualifying estates (5):
- Connecticut,
- District of Columbia
- Hawaii,
- Illinois,
- Maine,
- Maryland (note that Maryland imposes both estate and inheritance taxes),
- Massachusetts,
- Minnesota,
- New York,
- Oregon,
- Rhode Island,
- Vermont, and
- Washington.
Iowa,
- Nebraska,
- Kentucky,
- Maryland (note that Maryland imposes both estate and inheritance taxes),
- New Jersey, and
- Pennsylvania.
In these states, whether you owe inheritance tax depends on the value of the inheritance, your relationship to the deceased, and the state in which they resided.
For US citizens living abroad, inheritance tax obligations may be far more prevalent, especially in Europe, where many countries impose inheritance taxes with lower exemptions and higher rates compared to the US system. While inheritance tax is rare in the US, it is a routine consideration for expats navigating European tax systems.
Spotlight on Germany
In Germany, inheritance tax (Erbschaftsteuer) is imposed on the assets received by beneficiaries, not on the estate itself. (6) The tax applies based on the:
- relationship between the deceased and the beneficiary (exemptions for spouses are up to €500,000, children up to €400,000, and more distant relatives or unrelated individuals as low as €20,000), and
- value of the inheritance.
Tax rates range from 7% to 50%, with higher rates applying to distant relatives or larger inheritances.
- In Germany, inheritance tax liability arises if:
- the beneficiary is a German resident (not just a citizen),
- the deceased was a German resident, or
- certain assets are located in Germany.
The tax is calculated based on:
- the relationship between the deceased and the beneficiary, as well as
- the type and value of the inherited assets.
Notably, this means that even assets located outside Germany or inherited by German residents from abroad (e.g., from family members in the US) could be subject to German inheritance tax. Understanding these criteria is crucial for beneficiaries to evaluate their potential tax liability and coordinate planning with extended family members who may reside outside Germany.
Estate and Inheritance Tax for US Citizens Living Abroad
US citizens residing in Europe must consider the potential for dual tax exposure that can lead to overlapping, but separate liabilities:
- US federal estate tax applies to the worldwide assets of US citizens and residents, and
- European inheritance tax is based on the residence of the deceased or the heir.
US-Germany Treaty. The Estate and Gift Tax Treaty between the US and Germany offers some relief from double taxation but is limited in scope due to fundamental differences in the two countries’ tax systems. While the treaty allows for tax credits to offset amounts paid in one jurisdiction against liabilities in the other, its effectiveness is constrained by Germany’s inheritance tax structure, which is based on the beneficiary’s share, compared to the US estate tax, which applies to the total value of the deceased’s assets. This disparity makes applying tax credits more complex and often less impactful. Additionally, foreign tax credits at the US state level vary depending on individual state rules, requiring a case-by-case evaluation to determine applicability.
These differences underscore the challenge of navigating taxation across borders. The US estate tax focuses on the total value of an estate, while European inheritance taxes, such as those in Germany, emphasize the beneficiary’s share. Exemptions and rates differ significantly, with European systems often providing smaller exemptions and higher tax rates for distant relatives or non-relatives. Understanding these distinctions is crucial for effective cross-border estate planning and minimizing tax liabilities.
Looking Again at Germany. A US citizen living in Germany who inherits property from a US-based relative may benefit from the high US federal and state estate tax exemption but could face German inheritance tax if the deceased was not a German resident. This dual exposure underscores the importance of comprehensive cross-border estate planning.
Strategies for Cross-Border Estate & Inheritance Planning
Effective estate planning for US citizens in Europe requires a multi-jurisdictional approach. Key strategies include:
- Leveraging Tax Treaties: Confirm if your country of residence has a U.S Estate and Gift Tax Treaty that allows for credits to offset taxes paid in one country against those owed in the other, reducing overall liabilities.
- Using Lifetime Gifts: US citizens can gift up to $19,000 per recipient annually (2025 limit) tax-free, while many European countries provide similar allowances for lifetime gifting based on the recipient’s relationship to the giver.
- Establishing Trusts: Trusts may or may not be recognized across borders, the structure must be tested against both US and foreign law to avoid legal disputes and tax inefficiencies.
- Tailored Asset Allocation: By allocating assets strategically between the US and Europe, US expats can minimize tax exposure, particularly for properties, securities, and retirement accounts.
- Drafting a Recognized Will: Ensuring that a will complies with both US and local country legal standards is critical for smooth estate administration.
Many European countries implement inheritance and/or estate tax, with lower exemptions and higher rates, which can create unexpected liabilities for US residents across Europe, especially for assets inherited from abroad.
References
- IRS releases tax inflation adjustments for tax year 2025
- What Is the Future of the TCJA?
- Estate and Inheritance Taxes by State, 2024
- See 3
- Bloomberg Tax Chart
- Erbschaftsteur
About the Author
Arielle Tucker is a Certified Financial Planner™ and IRS Enrolled Agent. She's spent the last decade living between the US, Germany, and Switzerland. She is passionate about helping other U.S. expats and Americans living abroad achieve their dreams with the right financial and tax planning. Connected Financial Planning offers a complimentary introduction call for individuals and families seeking ongoing, comprehensive planning. You can schedule a call here.