Handling RSUs

In this chapter, we move on to the second risk that RSU holders must be aware of: US Estate Tax.

Estate tax is a tax on passing your assets to your heirs when you die. It is levied on the value of certain assets in your estate before they can pass to the people you leave them to.

The United States levies such a tax, and it applies not only to Americans, but to foreigners who hold US assets. If you, an Indian resident who is not a US citizen or resident, die owning US shares, those shares can be subject to US estate tax before your heirs inherit them. Your RSUs, once vested, are exactly this: shares in a US company, held in your name.

A US citizen enjoys an enormous estate tax exemption, in the millions of dollars, so estate tax affects very few of them. A non-resident foreigner gets almost none of that. The exemption on your US-situated assets is just $60,000.

Above that 60,000 dollar threshold, the value of your US assets can be taxed at rates climbing up to 40%. An RSU holder who has accumulated a few hundred thousand dollars of vested company stock has a large potential estate tax exposure, payable by their family in the event of their death, on everything above the first $60,000.

India and the US have a tax treaty that protects you from being taxed twice on dividends and gains, through the foreign tax credit. It does not cover estate tax. The US has separate estate tax treaties with a small number of countries that soften this exposure, but India is not among them. So for an Indian RSU holder, there is no treaty relief against US estate tax at all.

RSU holders are, of all investors, the most exposed to this trap, for three reasons.

• First, their holding is US-situs almost by definition, because the company granting the RSUs is typically a US company.
• Second, the holding is often large and concentrated. A single big position in one US stock is precisely the shape that pushes well past the $60,000 threshold.
• Third, they did not choose any of this deliberately, so they are the least likely to have thought about it. An investor who consciously bought US stocks might at least have encountered the estate issue. The RSU holder simply received shares as pay and never had reason to consider what happens to them at death.

The reassuring part is that the exposure is manageable. Since it comes from holding US-situs assets directly, the fixes involve changing what you hold. The main lever is the concentration solution from the last chapter: selling down an oversized US position and diversifying the proceeds reduces both single-company risk and your US-situs estate exposure at once.

And where you still want US exposure, holding it through a non-US-domiciled fund like UCITS ETFs, generally keeps it outside the estate net.