What Is International Estate Planning (and Why It’s More Complex)
International estate planning involves navigating a complex web of international rules and laws for those individuals that have ties to more than one country when planning an estate. This can include a U.S. citizen that has dual citizenship in another country or maintains a foreign residency, a U.S. citizen married to a non-U.S. citizen spouse, a U.S. citizen living in a foreign country, a U.S. citizen with beneficiaries in other countries, and a U.S. citizen with assets located in foreign countries.
The complexity of planning an international estate will depend on the specific country or countries you are dealing with, the location of the assets to be inherited, and the location of the beneficiaries. Generally, there are varying legal systems to navigate, multiple tax jurisdictions, possible probate laws, and forced heirship laws. There is also the challenge of determining which country’s laws apply: the country of your residence, your domicile, or where the assets are located.
While international estate planning guides can provide general, high-level information, it is best to speak with a knowledgeable and well-versed attorney and tax advisor. The estate planning and tax planning teams at Brown and Company have the expertise to help you navigate the complexities of international estate planning.
Common International Estate Planning Issues to Be Aware Of
Some common international estate planning issues to be aware of are:
- Conflicting inheritance laws.
- Forced heirship rules.
- Multi-jurisdiction of estates.
- Estate administration challenges.
Conflicting inheritance laws can cause several issues in an international estate plan. If an individual lives in one country and holds assets in another country this can create problems as to which country has jurisdiction. A will in one country detailing how an estate is to be deposed may not be valid in another country where the assets are located. For example, the United Kingdom (UK) follows Common English Law, while France follows a Civil Law System. This means in the U.K. an individual can depose of their estate how they choose. In France, forced heirship rules must be followed. This can create an issue if an individual has a U.K. will with assets in France.
A country with forced heirship as law will ignore the requests of the will. The estate will be divided into an indefeasible portion, or forced estate, and a discretionary portion, or free estate under forced heirship. The forced estate will generally pass to the deceased’s spouse, children, and parents. The free estate will be disposed of according to the will. Many times, a foreign country’s laws will override a deceased’s will.
Trying to decide which country has jurisdiction can become an issue with multi-jurisdiction of estates with international assets and heirs in multiple countries. Besides inheritance laws and forced heirship, deciding which country’s laws has precedence is critical.
This can also affect how the will, if it is considered valid, will be used to depose the estate. Many times, an estate will need to go through a probate process where the country’s or local authority’s laws will prevail. Trying to prove a will in multiple jurisdictions can become a costly and time-consuming administrative challenge.
Estate and Inheritance Tax Differences Between Countries
International assets can be subject to multiple jurisdictions and taxed multiple times. For example, a U.S. citizen living in a foreign country inheriting their parent’s mutual fund account may need to pay taxes on this inheritance to the country they are currently living in and to the U.S. This is an example of double taxation. Some countries do have tax treaties that reduce or eliminate double taxation in certain circumstances. There are limits in these clauses to prevent abuse of benefits.
Many countries also have estate taxes and inheritance taxes. An estate tax is levied on the total value of an estate before distribution. The taxes are paid by the estate. This scenario is common in the U.S. and U.K., where Common English Law prevails.
In many European countries an inheritance tax is levied on the amount received. This tax is paid by the person receiving the inheritance. These individual inheritance tax rates are generally much higher than estate taxes.
Inheritance taxes can vary widely depending on the country. Several countries also have wealth taxes on assets. These taxes are separate from estate and inheritance taxes and are generally taxed annually on the net wealth of an individual, regardless of their citizenship.
Navigating the various tax treaties and laws can be difficult. It is highly recommended to speak with a knowledgeable and well-versed financial advisor, attorney, and tax advisor when dealing with cross border estate planning. The estate planning and tax planning teams at Brown and Company have the expertise to help you navigate the complexities of international tax laws.
Residency, Citizenship, and Domicile Complications
The U.S. has specific legal definitions for residency, citizenship, and domicile. U.S. immigration law and the U.S. tax code each have separate standards for defining and determining residency.
Residency is the legal and physical act of living in a specific place, home, or jurisdiction for a designated period. This defines an individual’s location for legal purposes, such as taxation, voting rights, and access to services in an area or jurisdiction. Residency often requires establishing a permanent home, such as a house or apartment.
U.S. citizenship is the legal status granting the right to vote, live, and work in the U.S. It is granted upon birth within the U.S., its territories, and commonwealths, and through naturalization.
A domicile is a person’s fixed, permanent, and principal legal home to which they intend to return. This distinguishes the domicile for temporary residences as it requires both physical presence and the intent to remain indefinitely. It is used to determine legal jurisdiction for taxes, voting, and probate. A person can have several residences but only one domicile.
Under U.S. immigration law, residency concerns whether an individual is a Lawful Permanent Resident. This is also known as a green card holder. This means the individual has gone through the immigration process to become a permanent resident. This status allows the individual to live and work permanently in the U.S.
Under the U.S. tax code any U.S. citizen, non-U.S. citizen, resident, or non-resident alien can be taxed by the U.S. government, even if you are not domiciled in the U.S.
Residency and citizenship will dictate how an individual is subject to taxation on assets. Generally, citizens and residents in the U.S. are taxed on any worldwide assets. An estate is taxed by the federal government in the U.S. for any amount over $15 million or $30 million for a married couple worldwide.
If you live in a foreign country and retain U.S. citizenship you will pay taxes on your income and assets in the foreign country and again in the U.S. Non-resident aliens or non-domiciled individuals are subject to U.S. estate taxes for U.S. based assets. Any amounts above $60,000 are subject to a 40% tax rate.
Dual citizens may also pay taxes in two or more countries depending on where the citizenship is held and the jurisdiction’s rules, laws, and tax treaties.
Foreign Property and Asset Ownership Considerations
Foreign property refers to any asset, such as real estate, that you own outside your country of domicile. This can include a vacation home, an investment in a foreign company, a foreign bank account, and even personal items, situated abroad, such as a car, artwork, or furniture.
Real estate can be handled by creating a local, country-specific will to manage that property, separate from your U.S. estate plan. This approach avoids complex international probate, ensures compliance with local laws, such as forced heirship, and prevents conflicting directives. This option may require a local attorney in the country where the real estate is located.
A trust can also be set up in the country where the real estate is located and can be specially used for foreign assets located in that specific country. This can provide some level of protection against probate and help to honor your wishes.
Foreign bank and financial accounts require careful handling, as the U.S. taxes all worldwide assets. There are specific reporting requirements for financial accounts exceeding $10,000 at any time during a year. Your assets can suffer double taxation even with tax treaties and tax credits. It all depends on the country where the assets are located.
In the case of foreign bank and financial accounts it may be best to have a country-specific will developed, or a trust, or both depending on your personal situation and the country’s regulatory reporting requirements, taxes, and laws.
Trusts, Wills, and Legal Conflicts Across Borders
U.S. will and trusts do not automatically apply internationally. A U.S. will may not be recognized, proved, or enforced in a foreign jurisdiction. This is similar to the U.S. constitution not traveling with you to a foreign country. You must abide by all local and government rules and laws when traveling and living overseas. This is the same case with international estate planning.
It may be best to have a separate will, or trust, or both crafted for the specific foreign country you hold assets in depending on your particular situation. This is known as a situs will or a specialized legal document governing your assets in a specific, foreign jurisdiction: the situs. Doing so can avoid probate in the country where your assets are located. This situs will can work alongside a much broader will and estate plan.
In any event, the country where your assets are located will generally prevail in a dispute of disposing of your estate. This is why it is important to coordinate your international estate plan to ensure you are meeting the requirements of each jurisdiction of where you are domiciled, hold residency, and hold assets. There are many estate planning considerations for U.S. citizens living overseas and that is why having knowledgeable estate planning and tax planning is crucial.
Common Mistakes in International Estate Planning
Common mistakes to avoid in international estate planning:
- Assuming U.S. rules apply everywhere.
- Ignoring tax treaties.
- Failing to coordinate with advisors.
- Outdated documents after relocation.
One of the most common mistakes in international estate planning is having a one-size-fits-all plan. While this may be convenient it can create problems as a U.S. will is not valid in every country. Not having a tailored plan to your particular situation can lead to double taxation issues, forced heirship laws, lengthy probate, and costly legal disputes.
The best course is to have an international estate plan that works for your particular situation. Creating a plan that meets your specific needs and is legal for the specific jurisdiction is the best course of action. It also is a good idea to update any international estate plan you have and keep it current. Laws change and it is a good idea to coordinate your international estate plan with tax, financial, and legal advisors.
When to Work with a Financial Advisor on International Estate Planning
A financial advisor should be contacted to help you develop a comprehensive international estate plan if you have assets in a foreign country, live in a foreign country, or will inherit assets from a foreign country. Your advisor should also coordinate with attorneys and tax professionals to ensure you are covering all aspects and possible situations. A financial advisor can model several different scenarios and show you the implications of each and how they can affect you and your plan.
Brown and Company assists in providing comprehensive estate planning services for any situation. Together with an estate attorney we can help you develop an international estate plan that is valid for the country or countries where you are domiciled and have international assets. Our professional estate planners will work alongside our tax planning professionals to craft a personalized plan for you, so your wishes and legacy will be valid and honored. Contact us today for more information.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.