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November 4, 2022
In today’s interconnected world, cross-border estate planning is an important issue for global families. This is especially true when one or more individuals is a U.S. citizen or green card holder. A coordinated international estate plan is essential for families that face the possibility of a foreign-located decedent, beneficiaries in multiple countries, and/or assets located in different jurisdictions.
Global families (especially U.S. expats) creating an international estate plan need to understand relevant rules related to domicile, succession, generation-skipping transfer, gift tax laws in each country where distribution will occur, and where assets are held at the time of a decedent’s death. Adding a U.S. citizen or green card holder into the mix can complicate things even further. The United States imposes estate and gift taxes based upon citizenship, in addition to domicile like most other countries (see part 3). This can make U.S. expat estate planning particularly complex.
Failing to consider these multijurisdictional estate planning implications may create dramatic consequences, including assets passing to the wrong beneficiaries and excessive taxes. Fortunately, many of these unwanted financial and emotional ramifications can be avoided with the proper international estate planning strategy. This article introduces five key international estate planning considerations for an American expat, green card holder and/or other U.S.-connected person.
The United States imposes income and transfer (estate/gift) taxes based primarily upon citizenship. The maximum rate of the federal estate tax and gift tax is 40%. However, with a $25.84m estate tax exemption (2023) per married couple, many U.S. citizens are under the exemption amount and not overly concerned with estate tax planning. Below are a few more details about how the U.S. imposes estate and gift taxes:
Non-U.S. persons (nonresident aliens) may also face a U.S. estate tax on U.S. situs property, which is broadly U.S. real estate and shares in U.S. companies. If a nonresident alien resides in a country with which the U.S. has an estate tax treaty, they may have preferential estate and gift tax treatment. If there is no tax treaty, the nonresident alien may face significant U.S. taxation of their U.S. situs assets as they only have a $60,000 estate tax exemption (see part 4 on U.S. estate tax treaties).
As shown above, the United States has generous estate and gift tax exemptions for U.S. citizens. However, other countries have dramatically lower thresholds and vastly differing accounting requirements. Estate planning for U.S. persons living abroad or a resident in the United States with foreign assets can involve a multitude of issues and complexities that a purely domestic estate plan does not need to consider.
A principal difference is that many countries impose an inheritance tax instead of an estate tax. An inheritance tax means that the person receiving assets pays the tax rather than the estate. For example, an American expat domiciled in Spain who inherits her California resident father’s brokerage account may end up owing significant Spanish taxes on this inheritance. Inheritance tax laws vary greatly in scope and reach across countries. U.S. citizens living abroad in a country with an inheritance tax must not only plan their own estate but also strategize on how to tax-efficiently receive an inheritance from family and friends residing in the United States.
Another major difference around the world is succession laws and who assets may be passed to. Many civil law countries, including most of the countries in Europe, South America and Asia, place restrictions on who may receive assets at death. This may be referred to as forced heirship. Recently, the European Union alleviated some aspects of forced heirship through the EU Succession Regulation (EU 650/2012), which allows EU residents to elect their home country’s laws to govern probate and distribution of assets at death. Regardless, an individual must not assume they can pass assets to anyone they want when living in a civil law country.
Navigating the laws of multiple countries is a complex part of U.S. expat estate planning, but advanced planning can provide more certainty. Due to the various sets of rules and possible conflict of rules in different jurisdictions, failing to plan for events such as death and/or conflicts between regulation and a decedent’s wishes can result in very costly consequences or possibly even a total loss of one’s assets. It is essential to understand how different jurisdictions enable assets to pass to heirs at death.
When dealing with assets in different jurisdictions, individuals must understand issues relating to nationality, residency and domicile. Every country is unique in determining who and what may be subject to estate or inheritance taxes. A careful understanding of local law is essential as the requirements vary dramatically.
For immigrants to the United States, the U.S. estate tax is imposed based upon domicile. A person is domiciled in the United States for estate and gift tax purposes if they live in the United States and have no present intention of leaving. Generally, receiving a green card (permanent residency) indicates an intention to stay in the United States and establishes domicile. For example, an executive on a short-term assignment for a year in New York is likely not domiciled. However, a family living in the United States for three years on a green card will likely be considered fully domiciled and subject to U.S. estate and gift tax. There are no set rules for determining domicile and courts review many factors when deciding such cases.
Other countries have codified their requirements to determine when someone is resident and domiciled. This is most common in Europe where spending a specific number of days in the country will subject worldwide assets to local law. It is even possible that two or more countries will consider the same person a domiciliary and/or that certain assets may be subject to estate or gift tax in more than one country. Special tiebreaker rules contained in tax treaties may need to be utilized to determine legal domicile and to avoid double taxation.
Finally, situs rules affect how certain types of property will transfer. Situs refers to the location of the property for legal purposes. A vacation home in Italy owned by a U.S. citizen living in New York will be considered Italian situs property and be fully subject to Italian inheritance and transfer laws. If the U.S. citizen living in New York dies, New York state law directs how most of their U.S.-based assets pass. However, this does not apply to the Italian house, and Italy may place restrictions on who the house may pass to and may tax this transfer.
To provide some clarity on international transfer taxes, there are bilateral estate and gift tax treaties. The United States is a signatory to estate and/or gift tax treaties with 16 foreign countries. Each treaty alters in some respect the rules regarding the application of the estate and gift taxes between countries.
These international estate and gift tax treaties may be vastly different in content and protections afforded. For example, the U.S.-U.K. estate tax treaty and the U.S.-Germany estate tax treaty provide extensive protections, while the Swiss-U.S. estate tax treaty is much more limited in scope. Estate tax treaties provide a framework to determine the domicile of a decedent, situs of property and application of tax credits to avoid double taxation. Most commonly, estate tax treaties are used by non-U.S. citizens investing in the United States.
For non-U.S. citizens, estate tax treaties will alleviate U.S. estate tax on U.S. situs assets. For example, a non-U.S. individual resident in the United Kingdom who owns $300,000 of Apple (AAPL) stock at death will not face any extra U.S. taxation. However, if this individual moved to Dubai where there is no estate tax treaty, the value of AAPL (U.S.-based company, U.S. situs asset) is taxed at 40% on any amount over $60,000. The results can be quite dramatic, but advanced planning, possibly through an offshore corporation, trust or fund, can alleviate much of this taxation.
When moving across borders or acquiring assets in a different jurisdiction, it is vital to review and update an international estate plan accordingly. A single country-focused estate plan may create unforeseen and undesirable consequences when executed in a different country. It is vitally important to review how an estate plan will function in the country in which someone is resident and domiciled at death. For U.S. citizens living abroad, the U.S. estate tax limits must be considered.
An experienced international financial advisor can provide guidance on this topic and can help find legal counsel to adapt a will (last testament) so that it meets the requirements of the foreign country as well as those within the United States. By working with various legal experts on drafting the appropriate will, individuals can ensure their wishes are adhered to when it comes to the distribution of their estate at death.
In addition to a properly executed international will, reviewing any trusts in place is even more important. Trustees and settlors of trusts moving to a new country must carefully examine how the new jurisdiction treats trusts. Many countries do not recognize trusts (including most continental European countries). Other countries impose entry and exit taxes on trust assets (e.g., the United Kingdom and New Zealand). Moving a trust, possibly unknowingly by actions of a trustee or settlor, may create unforeseen consequences. It is highly recommended that individuals who are settlors or trustees take specialist tax advice before relocating to a new country.
When assets cross multiple jurisdictions, professional advice is important. An unplanned estate involving multiple assets or beneficiaries in multiple countries will also cause immense stress, financially and emotionally, for family members who must deal with different types of legal systems (common law versus civil law) and who often must travel to a foreign country in an attempt to prove their rightful share of an estate.
Cerity Partners provides global families with holistic financial management and an understanding of global probate and estate tax implications. Common international estate planning issues that we frequently advise upon include:
Cerity Partners works with a network of qualified professionals, such as accountants and attorneys, in each of these areas to ensure that there is a coordinated, tax-efficient plan put in place. We act as the central advisor for our global families to make sure the proper plan is executed.
Cerity Partners LLC (“Cerity Partners”) is an SEC-registered investment adviser with offices in throughout the United States. Registration of an Investment Advisor does not imply any level of skill or training. The foregoing is limited to general information about Cerity Partners’ services, which may not be suitable for everyone. You should not construe the information contained herein as personalized investment, insurance, tax, or legal advice. There is no guarantee that the views and opinions expressed in this presentation will come to pass. Before making any decision or taking any action that may affect your finances or your company’s finances, you should consult a qualified professional adviser. The information presented is subject to change without notice and is deemed reliable but is not guaranteed. For information pertaining to the registration status of Cerity Partners, please contact us or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). For additional information about Cerity Partners, including fees and services, send for our disclosure statement as set forth on Form CRS and ADV Part 2 using the contact information herein. Please read the disclosure statement carefully before you invest or send money.
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Frederic Behrens is a Partner in the New York office, where he provides investment management and financial advisory services for high-net-worth individuals and international families....
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