California is one of the most common destinations in the world for foreign nationals to own U.S. assets — real estate, commercial property, operating businesses, investment holdings. What's far less understood is what happens to those assets upon passing. U.S. estate tax and California probate rules apply regardless of where the owner lives.
For U.S. estate tax purposes, a foreign national — also called a nonresident alien — is someone who is not a U.S. citizen and is not domiciled in the United States. This distinction matters enormously upon passing.
While California does not impose a separate state estate tax, federal U.S. estate tax can still apply to U.S.-situs assets owned by foreign nationals upon passing, including:
U.S.-Situs Assets Subject to Estate Tax
The federal estate tax exemption for foreign nationals is significantly lower than for U.S. citizens — meaning a much larger portion of a California asset's value can be exposed to estate tax upon passing.
And unlike capital gains tax, which is triggered at sale, U.S. estate tax is triggered at passing. There is no planning window after the fact.
California probate is widely known for being formal, time-consuming, and court-driven. For a U.S. citizen, this is inconvenient. For a foreign national, it creates a compounding problem.
When a foreign national dies owning California assets:
The Probate Timeline Problem
The challenge facing most families isn't the value of the asset. It's having liquid cash available to meet tax obligations while probate runs its course in the background — without being forced to sell a property the family intended to keep.
An Irrevocable Life Insurance Trust — commonly called an ILIT — is a trust that owns a life insurance policy rather than the individual owning it personally.
When structured correctly, an ILIT can:
What a Properly Structured ILIT Provides
An ILIT does not eliminate U.S. estate tax. What it does is ensure there is cash available to handle it — without disrupting long-term assets the family intends to keep.
Case Study
Maria is a foreign national — not a U.S. citizen, not domiciled in the United States. She owns a $6,000,000 California residential property. Her family intends to keep it long-term. She understands that U.S. estate tax upon passing could reach up to 40%.
Potential U.S. Estate Tax Exposure
Without planning: sell the property they intended to keep, or find $2.4M in liquid cash while navigating California probate. With a properly structured ILIT: the death benefit pays directly to the trust — outside probate, outside the taxable estate — immediately available.
With ILIT proceeds in place, the trust can pay estate taxes and expenses without forcing a property sale, lend funds to the estate, or purchase assets from it — preserving the California real estate for the next generation as intended.
Life insurance owned by an ILIT pays directly to the trust, not the estate. Cash is available immediately — while California probate runs in the background on its own timeline.
The ILIT can lend funds to the estate or purchase assets from it — allowing estate taxes and expenses to be paid without rushing the sale of California property under unfavorable conditions.
If life insurance is owned personally, the death benefit is often included in the taxable estate — increasing the very problem it was meant to solve. ILIT ownership keeps insurance proceeds from adding to the estate tax burden.
ILITs are typically funded through annual gifts to the trust, which the trustee then uses to pay insurance premiums. Under current rules, gifts within annual exclusion limits can generally be made without paying gift tax or filing a gift tax return. Gifts above that threshold must be reported to the IRS and may reduce the lifetime exemption.
For foreign nationals, gifting strategies must always be coordinated with home-country tax rules — as cross-border gift and inheritance tax treatment varies significantly by jurisdiction.
An ILIT for a foreign national with California assets requires coordination across multiple dimensions:
Critical Coordination Points
Errors in any of these areas can undermine the planning entirely. Qualified California estate planning counsel and international tax advisors are essential.
Do foreign nationals pay U.S. estate tax on California real estate?
Yes. U.S.-situs assets — including California real estate — are subject to federal U.S. estate tax upon the passing of a foreign national, regardless of where the owner lived. The exemption available to foreign nationals is significantly lower than the exemption available to U.S. citizens.
Does California have its own estate tax for foreign nationals?
No. California does not impose a separate state estate tax. However, federal U.S. estate tax still applies to California assets owned by foreign nationals upon passing.
What is the difference between an ILIT and personally owned life insurance for estate planning?
When life insurance is owned personally, the death benefit is typically included in the taxable estate — potentially increasing estate tax exposure. An ILIT owns the policy instead, keeping proceeds outside the taxable estate and outside California probate, and providing immediate liquidity upon passing.
How long does California probate take for a foreign national's estate?
California probate timelines vary based on estate complexity, court schedules, and whether assets are contested. For estates involving foreign nationals, the process can take one to two years or longer — during which access to property may be restricted. This is precisely why liquidity planning matters.
Can a foreign national set up an ILIT in California?
Yes, though the structure requires careful coordination between California estate planning attorneys, U.S. tax advisors, and international tax counsel familiar with the owner's home jurisdiction. Rexford Insurance Solutions works alongside these advisors to ensure the insurance component is properly integrated.
We work alongside California estate planning attorneys, U.S. and international tax advisors, and family offices to ensure the insurance component of an estate plan supports California probate realities and provides liquidity at the right moment.
Start the Conversation →Rexford Insurance Solutions — Education First. Insurance Second. | California | Lic. 6017874. This article is for general informational and educational purposes only. It does not constitute legal, tax, or financial advice. Estate tax rules, exemption amounts, and planning strategies are subject to change. Consult qualified legal, tax, and financial advisors before implementing any estate planning strategy.