Understanding international laws is not just a concern for multinational corporations anymore. More people live, invest or do business outside of their home countries, and they need to understand how different laws affect their lives.
One aspect of international laws that requires more attention is estate laws, which govern what happens to properties in the event of incapacity or death of the owner. These unlikely events are not the first things that come to the minds of entrepreneurs or investors who are busy growing their assets.
However, failing to plan for such events can result in very costly consequences for one’s investments. It can also cause immense trouble for family members, who must deal with different legal systems, and often must travel to a distant foreign country to claim their rightful share. You can avoid these unwanted consequences by having an estate plan in place for all your international assets.
It is important that properties in multiple jurisdictions are not considered in isolation from each other. Different laws can have jurisdiction over the same property, or beneficiaries of the property might have liability for reporting and paying taxes in multiple countries. If there is no will, a property might be subject to the conflicting intestate succession rules of many countries.
This article is the first part of the International Estate Planning Basics series, wherein I will explain what US citizens should know about estate planning for their international families and properties. In this first article, I will discuss who needs to consider international estate planning.
Who Should Consider International Estate Planning?
Expatriates And Digital Nomads
Countries apply different succession and tax rules for individuals depending on nationality, domicile, place of residence, and the location where a property is situated. For expatriates and nomads who live outside their home countries, nationality, domicile, and residence might be all in different locations. The definitions of these terms also vary by country.
For example, a US citizen who lives in France, with an intention to remain indefinitely, is domiciled in France. For planning purposes, one can keep domicile in one place while changing residences. Nomads who constantly move to different countries can keep a domicile in the US, while maintaining residences in several countries.
Individuals With Properties in Foreign Countries
When a US citizen has a property in a foreign country, he or she should be aware of property and succession laws that will govern the disposition of the properties. First of all, a US citizen will need to pay tax to a foreign country in addition to US tax. If the country has a tax treaty with the US, tax can be reduced or eliminated.
Common types of properties subject to foreign laws are real properties, shares of stock issued by a foreign corporation, foreign insurance and deposits with a foreign commercial bank, or a foreign branch of a US commercial bank.
Individuals With Multinational Families
If a US citizen is married to a non-US citizen, he or she cannot take advantage of marital deduction, which allows unlimited transfer of assets to a surviving spouse at death, without being subject to estate tax. An annual gift that can be made without reporting is also limited to a certain amount ($148,000 in 2016).
In the US, as well as other common law countries, succession tax is payable by the estate before it is transferred to beneficiaries. Beneficiaries also receive a step-up in basis for inherited properties. It means that a basis that is used to calculate appreciation is raised from the purchase cost to the market value at the time of death, eliminating all the appreciation in value that is subject to a beneficiary’s income tax.
However, many countries with civil law systems tax beneficiaries before transfer of assets. Therefore, if a US citizen has beneficiaries who are citizens or residents of a different country, it is possible that transfer of assets at death can be taxed twice–to the estate and to a foreign beneficiary.
Currently, the United States has estate tax treaties with 15 countries, which can help US citizens avoid double taxation.
- The Netherlands
- South Africa
- United Kingdom
Typically, inheritance tax imposed on beneficiaries is based on citizenship or residency of the beneficiary. In many cases, it is the residency which can be also determined solely by the amount of days in the country, regardless of visa status.
The rate of inheritance tax in some countries is dependent on the relationship of transferor and transferee, making a transfer between distant relations subject to a higher tax rate. For example, in Germany, a trust is considered an unrelated party, so that a beneficiary in Germany has to pay the highest rate of inheritance tax when he receives properties owned by a trust.
Non-US Citizens With US Beneficiaries
Because US estate tax is based on domicile, which requires an intention to remain indefinitely, in addition to a physical presence, non-US citizens residing outside of the US are most likely not subject to US estate tax at death, unless they have US-located assets, such as real property or shares of US corporations.
However, there are some issues non-US citizens should consider if they have beneficiaries who are US residents or citizens. First, US beneficiaries can receive gifts from non-US citizens without estate or gift tax liability, but must report the amount and the source if the annual gift total is more than $15,601 (as of 2015), or the aggregate amount is over $100,000.
It should also be noted that outright gifts of non-US assets to US beneficiaries will be subject to worldwide income tax liability of the beneficiaries. In this case, non-US citizens can make use of trust structures before making a gift to minimize taxes for beneficiaries.
Non-US Citizens With Investments In The US
Non-US citizens are generally not subject to US estate tax unless they are domiciled residents in the US. However, they are liable for estate tax on their US-located properties, such as real property, tangible personal property, and shares of US corporations.
Non-US citizens have a lower threshold of $60,000 for estate tax-free transfer, compared to the one for US citizens, which is $5.45 million in 2016. As a result, they are likely to be exposed to higher tax liability for US properties before they can be transferred to beneficiaries. However, most countries will not tax transfer of properties in the US.
Former US Citizens Who Expatriated
Former US citizens who relinquished citizenship can most likely avoid US income and estate tax imposed on their worldwide assets. They become a tax resident of a new country.
However, a special rule applies to covered expatriates who relinquish citizenship or green card while they have an average annual net US income tax of $160,000 for the five years prior to expatriation, or have a net worth of $2,000,000 or more.
If gifts or bequests are made from covered expatriates to US citizens or residents, the highest rate of estate and gift tax should be paid by the recipients on worldwide assets. The tax amount can be reduced by any tax paid to a foreign country.
There are generally three sources of international planning needs: foreign located deceased, foreign located beneficiaries, and foreign located assets. Often, the determination of their location and character are not easy, because the laws of different countries define residency/domicile and characters of assets differently.
As a family moves to another country or invests in a global portfolio, it is important that they create a plan that maximizes the benefit of global exposure, while reducing confusion and stress.
In the next article, I will discuss various legal systems to which an expatriate or international investor can be exposed, and how it is determined what law applies to the person.
Call our office to schedule a time to talk about a Wealth Planning Session, where we can identify the best ways for you to ensure your legacy of love, and financial security for your family.
This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.