US Estate Tax: Global Assets Guide for Fund Managers
US Estate Tax Global Assets Fund Managers Face
US estate tax global assets fund managers hold can span dozens of jurisdictions — carried interest in Cayman structures, LP interests in Delaware funds, UK residential property, Swiss banking accounts, and co-investment stakes across Europe and Asia. Furthermore, every one of those assets is included in the worldwide gross estate of a US citizen at death, subject to federal estate tax at 40% above the applicable exemption threshold. Consequently, fund managers who have spent careers accumulating complex multi-jurisdictional wealth face an estate tax exposure that is both enormous in absolute terms and extraordinarily difficult to quantify without specialist cross-border analysis.
Additionally, fund managers face estate-planning challenges unique to their professional context. Specifically, carried interest — the performance fee entitlement that represents a significant portion of most fund managers' net worth — has a complex character for estate tax purposes that depends on how the carry is structured, when it vests, and how the underlying fund documents define the interest. Moreover, interests in offshore funds, such as Cayman Islands limited partnerships, may themselves be treated as passive foreign investment companies for US income tax purposes, creating a further layer of complexity when valuing and planning for estate tax. Therefore, generic estate planning that does not address the specific nature of fund manager wealth is rarely adequate.
What Is Included in a Fund Manager's US Gross Estate
Carried Interest and Its Estate Tax Treatment
Carried interest is the fund manager's share of fund profits above a specified hurdle rate, typically 20% of profits above an 8% preferred return. For US estate tax purposes, the value of unvested or contingent carried interest at the date of death is generally included in the gross estate at its fair market value, even where that interest is not yet payable and may never be payable if the fund does not achieve sufficient returns. Furthermore, valuing unvested carry for estate tax purposes requires a detailed analysis of the fund's current portfolio values, the likelihood of achieving carry based on the current NAV, and the discount applicable to a contingent interest that a hypothetical buyer and seller would agree upon in an arm's length transaction.
Moreover, different fund structures treat carry differently. Specifically, in some structures, the carry is held through a UK LLP or a Cayman LP in which the manager has a direct capital interest. In contrast, in others,s the carry is paid through a management company or a carried interest vehicle that is itself owned by a US entity. Consequently, the estate planning strategy must be tailored to the specific structure of each carry arrangement rather than applying a standardized approach. Additionally, when a carry is held through a CFC or a PFIC, the interaction with the GILTI and PFIC rules adds further complexity to the estate-planning analysis.
Offshore Fund Interests and PFIC Considerations
Many fund managers have personal co-investment interests in the funds they manage, in addition to their carried interest. Furthermore, these co-investments are often made through offshore vehicles — Cayman feeder funds, Luxembourg SICAVs, or Irish QIAIFs — that are likely to be classified as PFICs for US tax purposes because their income is predominantly passive investment income. Consequently, the valuation of PFIC interests for estate tax purposes must consider not only the current NAV but also the embedded PFIC excess distribution charge that a hypothetical purchaser of those interests would factor into the price they were willing to pay.
Additionally, where the fund manager's estate includes interests in multiple offshore funds across different jurisdictions, the estate executor must obtain independent valuations of each interest as at the date of death, which can be time-consuming and expensive. Moreover, the availability of minority discount and marketability discount reductions from the fund's stated NAV is a contested area, and the IRS has challenged aggressive discounting of offshore fund interests in estate tax examinations. Therefore, the valuation methodology applied to these interests must be documented with a formal appraisal from a qualified independent appraiser to have any prospect of withstanding IRS scrutiny.
Cross-Border Estate Tax Exposure: UK and US Simultaneously
UK Inheritance Tax and Deemed Domicile
A US citizen who has lived and worked in the UK for fifteen or more of the previous twenty tax years will have acquired deemed UK domicile under the Finance Act 2013 rules, making their worldwide estate subject to UK inheritance tax at 40% above the nil-rate band of £325,000. Furthermore, for fund managers based in London — the dominant European hub for private equity, hedge funds, and real asset management — long UK residence is the norm rather than the exception, meaning most senior US-citizen fund managers are simultaneously exposed to US estate tax on the worldwide estate and UK IHT on the same worldwide assets.
Consequently, without effective cross-border estate planning, a US-citizen fund manager dying while UK-deemed domiciled could face a combined effective rate of 40% US estate tax and 40% UK IHT on the same pool of worldwide assets — a confiscatory outcome that the US-UK Estate and Gift Tax Treaty is intended, but not always able, to prevent. Moreover, the treaty's credit provisions operate by reference to domicile in the treaty sense, which may differ from both the US citizenship basis and the UK deemed domicile concept, creating gaps that must be identified and addressed through specific planning rather than reliance on the treaty alone.
The US-UK Estate Tax Treaty for Fund Managers
The US-UK Estate and Gift Tax Treaty provides that where a decedent was domiciled in one contracting state at death, that state has primary taxing rights on the worldwide estate, with credit available in the other state for taxes imposed on the same assets. Furthermore, for a US-citizen fund manager who is also UK-deemed domiciled, both countries assert primary taxing rights simultaneously — the US on a citizenship basis and the UK on a deemed domicile basis — which is precisely the scenario the treaty credit provisions are designed to address. However, the credit mechanism does not eliminate the charge in every case, and the calculation of the allowable credit is subject to complex ordering rules that require specialist analysis.
Additionally, certain assets may be treated as US-situs assets for US estate tax purposes but as UK-situs assets for IHT purposes, or vice versa, creating situations in which neither the US credit nor the UK credit fully covers the other country's charge. For example, interests in Delaware limited partnerships may be treated as US-situs assets for estate tax. In contrast, the same economic interest might be characterized as a UK-situs asset for IHT depending on where the partnership's business is managed and controlled. Therefore, a detailed asset-by-asset situs analysis is an essential component of estate planning for fund managers with multi-jurisdictional holdings.
Planning Strategies for US-Citizen Fund Managers
Lifetime Gifting and the Sunset Risk
The most straightforward estate planning tool available to US-citizen fund managers is the current elevated gift and estate tax exemption of $13.61 million per person, which allows substantial assets to be transferred to family members or trusts free of US gift tax during the manager's lifetime. Furthermore, the exemption is scheduled to be reduced to approximately $7 million per person after 31 December 2025, unless Congress extends the current rules, making the window before the sunset a critical planning period for fund managers with large estates. Consequently, those who fail to utilize the current high exemption through lifetime gifts before the sunset may permanently lose access to the additional capacity currently available.
Moreover, transfers of carried interest and fund co-investment interests before they reach peak value can be particularly effective, since assets gifted at an early stage of the fund lifecycle — when carry is contingent, and co-investments are at or near cost — are valued for gift tax purposes at their current fair market value rather than their ultimate realized value. Additionally, valuation discounts for lack of control and lack of marketability may be available on some fund interests, further reducing the taxable value of the transfer. However, the IRS closely scrutinizes aggressive discounting of these interests, so a formal qualified appraisal must support the valuation.
Trust Structures for Fund Manager Estates
For fund managers with estates well above the available exemption, irrevocable trust structures can provide long-term estate tax efficiency. Specifically, a spousal lifetime access trust (SLAT) allows a US-citizen fund manager to transfer assets into an irrevocable trust for the benefit of their spouse and descendants, removing the assets from the estate while still allowing the spouse to benefit from distributions during their lifetime. Furthermore, if the fund manager has a non-US-citizen spouse, a qualified domestic trust (QDOT) may be needed to defer the estate tax on assets passing to the surviving spouse at death, since the unlimited marital deduction is not available for transfers to non-US-citizen spouses.
Additionally, dynasty trust structures established in US states with favorable trust laws — such as South Dakota or Nevada — can hold assets, including fund interests, across multiple generations without the trust assets being subject to estate tax at each generational transfer, provided the trust is structured to satisfy the generation-skipping transfer tax exemption rules. However, these structures must also be reviewed from a UK IHT perspective, since a trust settled by a UK deemed domiciliary may be subject to UK tenth anniversary charges and exit charges that significantly reduce the overall efficiency of the arrangement.
Case Study: London-Based US Fund Manager
Background and Exposure
Our team advised a US citizen who had worked as a partner at a London-based private equity firm for eighteen years and held a worldwide estate valued at approximately $28 million, including carried interest in three active funds (estimated value $8.2 million), co-investment interests in two Cayman feeder funds (NAV $6.4 million), UK residential property ($3.8 million), UK pension ($2.1 million), and diversified cash and listed securities ($7.5 million). The client was deemed UK-domiciled, having exceeded the 15-year residence threshold six years earlier, and had never undertaken any formal cross-border estate planning.
Planning and Outcome
After a full cross-border estate and IHT analysis, we identified that the worldwide estate was exposed to a combined US estate tax and UK IHT liability of approximately $9.8 million before any planning. Furthermore, we coordinated with a UK solicitor and a US estate attorney to implement a phased planning program that included maximum lifetime gifts to an SLAT using the 2024 exemption before the anticipated sunset, early-stage carried interest transfers to family members at contingent value with qualified appraisals supporting the valuation, and a QDOT provision in the will for assets passing to the client's French-citizen spouse. Additionally, we obtained a formal opinion on the treaty credit position for the co-investment interests. The combined interventions reduced the projected combined tax liability from $9.8 million to approximately $3.1 million on the same asset base, a saving of $6.7 million.
Get in Touch
At US-UK Tax, our team provides specialist cross-border estate and tax planning for US citizens working in financial services in the United Kingdom. Furthermore, we understand the specific estate planning challenges created by the US estate tax for global assets held by fund managers — from carried interest valuation to offshore fund characterization and QDOT planning for non-citizen spouses. We coordinate directly with UK solicitors and US estate attorneys to ensure that every element of the plan works cohesively across both tax systems.
Contact our team today to discuss your estate planning position. Email hello@us-uktax.com, call 0333-8807974, or visit https://www.us-uktax.com/contact/ to book a confidential consultation.
Conclusion
US estate tax on global assets requires specialist planning that goes well beyond generic wealth management advice. Furthermore, the combination of carried interest, offshore fund interests, UK deemed domicile, and non-citizen spouses creates a planning challenge that demands deep knowledge of both US and UK tax law simultaneously. Moreover, the 2025 sunset of the elevated exemption makes the current year a critical window for implementing strategies that may not be available on the same terms in future years. Consequently, fund managers should treat cross-border estate planning as an urgent priority rather than a matter to be deferred until closer to retirement.
Contact US-UK Tax today at hello@us-uktax.com or call 0333-8807974 to begin a comprehensive review of your worldwide estate position.
Contact Us
US-UK Tax | hello@us-uktax.com | 0333-8807974