11 Jul 2023

The case against investing in US assets

I am a big proponent of global investing, but Indian investors must avoid US assets as much as they can.

I am supportive of buying US stocks as investment assets. In fact, a big chunk of my investment portfolio is US companies. But I recommend against buying those shares directly. If you simply buy US stocks through a US broker (or their Indian partners such as Vested, IndMoney, etc), you’ll be acquiring US domiciled assets. US domiciled assets are bad because they attract US estate tax. ETFs such as VOO and BND are also US domiciled, and should be avoided.

The best way to buy US assets is through instruments that are domiciled in a country that does not collect unfair estate taxes. Any mutual fund sold by Indian AMCs, for example. Ireland domiciled ETFs are another option for those who are comfortable trading in markets outside India.

What is estate tax?

‘Estate tax’ by Nick Youngson CC BY-SA 3.0 Pix4free

Estate tax is the tax some countries collect when a deceased person’s assets are transferred to their legal heirs. If a US resident’s assets are passed to their heirs, assets worth up to 11 million US dollars are transferable without any tax. However, when transferring the assets of nonresident aliens, the US will start collecting taxes at mere 60,000 USD. The tax rate can go up to 40%. My estimation a few months ago was that there will be a tax liability of 3.4 crores INR while transferring a portfolio worth 10 crores INR. To be clear, this is not tax on the gains, but tax on the entire portfolio that is transferred!

But wait, the story gets worse. Even if you accept to pay this unfair tax, the transfer process won’t be quick. My employer has hired a firm to help with such transfers. (If I were to die tomorrow, my family can get assistance from this firm to transfer my assets to their names.) Even with this professional help, they are saying the transfer process can take up to 24 months. While this process is happening, all my US assets will be frozen. My family cannot sell these assets if there was an emergency. Nor can they maintain the portfolio by selling some shares to reduce risk.

My recommendation

Many investment platforms have made US investing extremely easy for Indian investors. While their offerings are great, it is prudent to stay away from them because the US is an unfair and unfriendly place for nonresident aliens like us.

FAQ: I am just 25 and single. Why should I worry about estate tax?

Whenever I talk about estate tax, someone young asks me this. “Why should I worry about estate tax?” The answer I give them is that, “I don’t plan on dying too, but death is inevitable and the time of death unpredictable.”

The main reason people ask this question is that they underestimate the longevity of their investment portfolio. If we are disciplined with investing, our retirement portfolio will last 50 to 80 years or even longer.

Our investment portfolios start small and humble. We don’t expect it to grow to 8 or 9 digit figures. But for most of us, the corpus will grow that big because we’ll be investing for 20, 30, or 40 years. And then we’ll retire and live off of that portfolio for the next 30 or 40 years. Do you want your spouse or your children to pay such a large sum to the US as tax? Especially when there are very good alternatives available, why should we make our families to go through this hassle?

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