info@abacus-wealth.com
Global Estate Planning Considerations – U.S. Expats & Foreign Nationals
March 14, 2022
Estate planning is complex enough in the U.S. let alone internationally. When putting together an international estate plan, global families, particularly U.S. expats, must be aware of the relevant rules governing domicile, succession, generation-skipping transfer, situs rules and gift tax laws in each nation where allocation will take place, or where assets will be retained at the time of a decedent’s death. Bringing a non-U.S. citizen spouse or heirs to the mix might further complicate the situation. The United States also levies estate and gift taxes based on citizenship as well as domicile. This can make estate planning for non-resident U.S. expats and non-U.S. citizens with substantial U.S. investments, extremely difficult.
Failure to address these multi-jurisdictional estate planning issues may result in disastrous outcomes, such as assets transferring to the wrong beneficiaries, excessive taxes and unnecessary expenses. Thankfully, with the appropriate international estate planning approach, many of these unwelcome financial and emotional implications may be avoided.
- U.S. Estate and Gift Tax Law Basics
U.S. citizenship and residency play a major role in the imposition of income and transfer (estate/gift) taxes. The federal estate and gift tax has a maximum rate of 40%. Conversely, with an $11.7 million estate tax exemption (2021), most U.S. citizens are not as concerned about estate tax planning. Here are some further specifics regarding how the United States charges estate and gift taxes as of 2021:
| U.S. Citizen | U.S. Permanent Resident (Green Card) |
Non-Resident Alien (Non-U.S. Person) |
|---|---|---|
| Estate tax on worldwide assets | Estate tax on worldwide assets | Estate tax on U.S. situs assets |
| $11.7M exemption | $11.7M exemption | $60,000 exemption |
| Unlimited spousal transfer to U.S. citizen spouses | $159,000 annual exempt spousal transfer | $159,000 annual exempt spousal transfer |
| $15,000 annual gift exclusion to non-spouse | $15,000 annual gift exclusion to non-spouse | $15,000 gift exclusion on real & tangible U.S. situs property |
Non-resident aliens (NRA) who reside in a nation with which the United States has an estate tax treaty may be eligible for favorable estate and gift tax treatment. If no tax treaty exists, the NRA may incur substantial U.S. taxation on their U.S. situs assets over $60,000. NRA transfers subject to gift tax include real and tangible personal property that is situated in the U.S. However, gifts of U.S.-situated intangible property are not subject to gift tax. See IRC § 2501(a)(2). Such intangibles include, for example, U.S. situs stocks and ETFs.
- Beware of Estate and Inheritance Rules where the Decedents and Assets are Situated
As indicated above, the United States provides considerable estate and gift tax exemptions to its citizens. Other countries, on the other hand, have significantly lower thresholds and vastly different accounting rules. Estate planning for U.S. citizens living abroad or U.S. citizens with overseas assets can involve a variety of issues and complications that a solely domestic estate plan does not take into consideration.
The main distinction is that many nations will levy an inheritance tax rather than an estate tax. In the case of an inheritance tax, the individual receiving the assets pays the tax rather than the estate of the decedent. For instance, a U.S. expat living in Japan who inherits her California resident father’s brokerage account may wind up owing considerable Japanese inheritance taxes after having lived in Japan for a considerable amount of time.
The extent and reach of inheritance tax rules varies substantially between nations. U.S. citizens residing in a nation with an inheritance tax should not only prepare their own estate, but also evaluate how to receive an inheritance from family and friends in the United States in the most tax-efficient manner possible.
Another substantial distinction across countries is succession laws and who can inherit assets. Many civil law jurisdictions, including the majority of Europe, South America, and Asia, limit who can inherit assets upon death. Forced heirship is a term used to describe this situation.
Estate planning for U.S expats living abroad is complicated since it involves navigating the rules of various jurisdictions. Hence, proper international estate planning is essential for the efficient distribution of assets to the rightful heirs. Failure to plan for occurrences such as death and/or conflicts between regulation and a decedent’s wishes can result in costly repercussions or even a total loss of one’s assets due to the many sets of regulations and probable conflict of rules in different jurisdictions. It’s critical to know how various governments handle asset transfers upon death.
- Understand the Nuances of Nationality, Residency, Domicile and Situs Rules
Every country determines who and what is liable for estate or inheritance taxes in its own way. Because the criteria differ widely, it is critical to have a thorough grasp of local legislation on various estate planning aspects.
The U.S. estate tax is imposed on immigrants to the United States based on their domicile. For estate and gift tax purposes, a person is domiciled in the United States if they dwell in the country and have no plans to leave. In general, acquiring a green card (permanent residency) establishes domicile and signifies a desire to remain in the United States. For example, an executive on a one-year assignment in New Jersey is unlikely to be domiciled. However, a family with a green card that has lived in the United States for three years would most likely be regarded completely domiciled and may be subject to U.S. estate and gift tax. There are no set criteria for defining domicile, and courts will analyze a variety of considerations when making such judgments.
Various countries have formalized their rules for determining who is a resident and who is domiciled. In these nations, staying for a certain number of days or years subjects all of your assets to local law. It’s even feasible that the same individual could be considered a domiciliary in two or more countries, and that some assets will be liable to estate or gift tax in more than one nation. To identify legal residence and avoid double taxation, certain tie-breaker criteria specified in tax treaties may be required.
Lastly, situs regulations have an impact on the transfer of certain types of property. For legal reasons, the term “situs” refers to the location of the property. A U.S. citizen residing in Florida who owns a vacation house in Taiwan will have their vacation home deemed as Taiwanese situs property and will be subject to Taiwanese inheritance and transfer regulations. If the U.S. citizen residing in Florida passes away, the state law will determine how most of their U.S.-based assets are distributed. This will not apply to the Taiwanese vacation home, and Taiwan may impose limits on who the house may be passed on to and may tax the transfer.
- Check for Relevant Bilateral Estate & Gift Tax Treaties with the U.S.
There are bilateral estate and gift tax treaties that help to clarify foreign transfer taxes. The United States has estate tax treaties with Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherland, Norway, South Africa, Switzerland, and the United Kingdom. Each treaty modifies the laws governing the application of inheritance and gift taxes between nations in some way.
These foreign estate and gift tax treaties may range greatly in terms of content and protections provided. The U.S.-U.K. estate tax treaty and the U.S.-Germany estate tax treaty, for example, give considerable safeguards, but the Swiss-U.S. scope of the estate tax treaty is substantially narrower. Estate tax treaties offer a framework for determining a decedent’s residence, the location of property, and the use of tax credits to avoid double taxation. Estate tax treaties are most typically employed by non-US citizens investing in the United States.
For non-US citizens, estate tax treaties will reduce the U.S. estate tax on U.S. situs assets. For example, an NRA living in a nation with a U.S. estate and gift tax treaty who owns $300,000 in Apple (AAPL) stocks dies, he or she may not be liable for additional U.S. taxation. If this individual relocates to Dubai, where there is no estate tax treaty, the value of AAPL (US based firm, US situs asset) may be taxed at 40% on any amount above $60,000. The consequences can be severe, but careful preparation, potentially through an offshore corporations, trusts, or funds, can relieve most of these estate issues.
- Regularly Update Your Cross Border Estate Plan
It is critical to examine and update a cross border estate plan when relocating across borders or purchasing assets in another jurisdiction. When carried out in a foreign nation, a single country-focused estate plan may have unexpected and negative outcomes. It’s critical to think about how an estate plan would work in the country in which someone lives and is domiciled at death. The U.S. estate tax restrictions must be addressed for U.S. expats.
An expert cross border financial adviser may offer advice on this issue and assist in finding legal counsel to modify a will (last testament) to fit the standards of both the foreign nation and the United States. Individuals can guarantee their preferences are followed when it comes to the distribution of their assets upon death by engaging with various legal specialists on establishing suitable estate planning tools.
Evaluating any existing trusts is even more crucial than having a properly drafted international will. Trustees and settlors of trusts who are relocating to a new nation must research the new jurisdiction’s approach to trusts. Trusts are not recognized in many countries and there are those that imposes entry and exit taxes on trust assets. Transferring a trust, whether intentionally or not by a trustee or settlor, might have unexpected repercussions. Individuals who are settlors or trustees should get professional tax counsel before migrating to another country.
Conclusion
Foreign investors investing in the United States should understand that their domicile and/or citizenship will have an impact on his or her exposure to U.S. estate and gift taxes. If a non-resident alien (NRA) investor resides in the United States or in a treaty country at the time he or she dies or makes a gift, a treaty may be available to substantially affect the ultimate taxation thereof. With that said, NRA investors and spouses of foreign investors must understand that treaty applications are not automatic. Once an NRA owning U.S. situs property, depending on the value of the U.S. situs property, the estate of the nonresident investor may need to file an IRS Form 706-NA entitled “United States Estate (and Generation-Skipping Transfer) Tax Return” and IRS Form 8833 “Treaty-Based Position Disclosure Under Section 6114 and 7701(b). On the flipside, U.S. expats living abroad should likewise be vigilant of estate and inheritance rules governing their country of domicile and plan accordingly. They cannot rely on their U.S. estate plan alone. They should also consider properly planning for inheritances they might expect to receive while living abroad as inheritance laws in their county of domicile may impose certain inheritance taxes upon the death of a family member who leave them with an inheritance. Always consult with a properly skilled cross border financial advisor, tax advisor and attorney for professional advice.
Disclaimer
- The information provided is for educational purposes only and does not constitute personal financial, tax or investment advice and should not be relied on as such. It does not take into consideration any investor’s particular investment objectives, strategies, time horizon, and tax or legal status. Abacus Wealth International (AWI) does not provide tax or legal advice. Please consult a tax or legal professional for corresponding tax and legal advice.
- All material and content have been obtained from sources believed to be reliable. AWI does not guaranty the accuracy of the information provided and shall not be held liable for decisions based on the foregoing information.
- All examples of graphs, financial products and historical returns contained in the foregoing material is for illustration and educational purposes only and shall not be deemed as financial advice or recommendation. Past performance is not indicative of any future investment returns.