The term "international estate planning" may conjure up images of offshore trusts in the Cayman Islands or numbered bank accounts in Switzerland, but multi-national tax and fiduciary law issues affect not only ultra-wealthy international jet-setters, but also anyone who is a resident non-citizen, who is married to a non-citizen, or who has property located in more than one country.
There are two basic estate planning issues that need to be addressed if you reside in the United States:
- Planning for distribution of property at death. You should have a Last Will and Testament to direct how your property will be distributed after your death. Alternatively, a Revocable "Living" Trust Agreement may be used for this purpose and has the added benefit of avoiding probate with the Clerk of Court. In either case, the document should (a) designate the individual or corporate fiduciary who will administer your estate or trust after your death, (b) clearly identify the beneficiaries who will receive your property, and (c) include appropriate trust arrangements for any beneficiary who is incompetent or too young to receive property outright.
- Planning for incapacity. You also need to plan for the possibility that you may become incapacitated prior to death. You should have a Durable General Power of Attorney in which a third party (either an individual or a corporate fiduciary) is named as your "attorney-in-fact" to handle your personal and financial affairs in the event you become incapacitated. Similarly, you should have a Health Care Power of Attorney naming one or more trusted individuals to make health care decisions for you if you cannot communicate your intent. You also may want a so-called "Living Will" which expresses your wishes concerning end-of-life decisions.
Although your need for these basic estate planning documents is unaffected by your nationality, certain special considerations apply if you are a foreign national, are married to a foreign national, or have property located in a foreign country:
Non-Tax Considerations in International Estate Planning
If you are a foreign national or you have property located in a foreign country, unique non-tax considerations affecting your estate plan include the following:
- A will or trust prepared under the laws of the United States may not be effective to dispose of your property that is located in another country. Accordingly, if you have such property, you likely will need a will or trust prepared under the laws of that country, particularly if your foreign property consists of real estate.
- You might like to name family members residing in your foreign home country as executor, trustee, or attorney-in-fact under your U.S. estate planning documents. Typically, there are no legal prohibitions on a foreign individual serving in these roles in the United States, but logistical issues and language barriers can make such service impracticable, which amplifies the importance of naming back-up fiduciaries.
- A U.S. court will have initial jurisdiction over the guardianship of minor children and will require a local resident to serve as guardian. While it is possible to transfer guardianship to an individual in another country, the process is not simple and straightforward.
Federal Tax Considerations in International Estate Planning*
If you are a resident non-citizen or a citizen who owns property in another country, you must consider the impact of both U.S. and foreign estate tax laws. An estate tax is a "transfer tax" which taxes the right of a decedent to transfer wealth to other individuals. In the United States, if the tax applies, it is due generally nine months after the date of death.
Three factors control the application of U.S. estate tax laws: citizenship, residency, and situs (or location) of property. U.S. citizens are subject to estate taxation on their property located worldwide, not just their property located in the United States. This worldwide taxation scheme creates a real risk of double taxation, as property located in a foreign country may be subject to the estate tax of both the foreign country and the United States. Although many countries have tax treaties with the United States that avoid double taxation on income, only a few countries have tax treaties that avoid double taxation on estates.
The U.S. estate tax was repealed for the year 2010. However, barring congressional and presidential action prior to January 1, 2011, the federal estate tax will be reinstated automatically on that date. Therefore, as matters stand now, beginning in 2011, three basic estate tax principles will apply for both U.S. citizens and resident non-citizens:
- The unlimited "marital deduction" will allow property to pass to a surviving spouse tax-free. However, this deduction will be available only for spouses who are U.S. citizens. If your spouse is a non-citizen, the marital deduction may be claimed only if the property passes into a Qualified Domestic Trust ("QDOT") with a U.S. trustee. A QDOT will distribute all of its income to your surviving spouse and may permit distributions of its principal to your spouse, but any principal distributions will be subject to federal estate taxation as if the property was part of your taxable estate. At your spouse's subsequent death, all remaining trust property will be subject to estate tax at your tax rate, not your spouse's tax rate.
- The unlimited charitable deduction will avoid taxation on any property passing to a qualified charitable organization. Note, however, that most foreign charitable organizations will not qualify for the charitable deduction.
- The "applicable exclusion amount" will be the amount of property that can pass free of estate tax to all other beneficiaries (regardless of the beneficiaries' domicile or citizenship). Starting in 2011, the exclusion will be $1,000,000 (although it is possible that the Congress that will convene in 2011 will change the exclusion). If the value of all of a decedent's property is above the applicable exclusion amount, the portion of the value above the applicable exclusion amount will be taxed at 55%.
If you are a resident non-citizen, you are subject to the same estate tax rules as U.S. citizens, including taxation on your worldwide property. For purposes of the U.S. estate tax laws, residency means domicile, which is a different, and more subjective, standard than the federal income tax concept of a resident alien. U.S. "domicile" has two components: physical presence in the United States and the intent to remain in the United States indefinitely. Proof of U.S. domicile is fact specific to your particular circumstances and requires a consideration of the following factors:
- Whether your entry into the United States was pursuant to a permanent resident visa;
- Whether you obtained a green card and a social security number;
- The amount and location of your property;
- Whether you have filed tax returns in the United States and/or your home country;
- The amount of your international travel and the duration of your stays in the United States;
- Whether you have obtained a U.S. driver's license;
- The immigration history of your family;
- The size, value, and type of your home in the United States;
- Your motivations for being in the United States; and,
- Your group affiliations and involvement in community affairs.
Federal Estate Tax Planning Techniques for U.S. Citizens and Resident Non-Citizens
If the combined value of your and your spouse's estates will be less than the applicable exclusion amount ($1,000,000 in 2011), you need not be concerned about the effect of U.S. estate tax laws. However, if you are a resident non-citizen, you need to consider whether your home country's estate tax system will be triggered. Similarly, if you are a U.S. citizen who has property located in a foreign country, you need to determine whether such property is subject to taxation by that country.
If your and your spouse's combined estates exceed the applicable exclusion amount, your estate planning documents should create trusts to utilize both spouses' exclusions which, in 2011, will allow a married couple to protect up to $2,000,000 of property from U.S. estate tax. In addition, both individuals and married couples may use lifetime gifts to reduce their taxable estates. Such gifts may utilize an annual exclusion of $13,000 per year per donee and a $1,000,000 lifetime gift tax exemption (for all gifts not qualifying for the annual exclusion), and may take the form of gifts of cash, securities, and real estate, or may be used to fund life insurance policies. Often, irrevocable trusts are used to receive and hold the gifted property.
Federal Estate Tax Planning for Non-Resident Non-Citizens
If you are a non-resident non-citizen ("NRNC"), you are not subject to the U.S. system of estate taxation on your worldwide property. Rather, U.S. estate taxes are imposed only on your property legally located in the United States, including:
- Real estate located in the United States;
- Stock in a U.S. corporation;
- Deposits in U.S. banks;
- Debt obligations of U.S. residents to you;
- Intangible personal property if issued by, or enforceable against, a U.S. resident, a U.S. corporation, or a U.S. governmental unit (but not proceeds from a life insurance policy, even if issued by a U.S. insurance company); and,
- Tangible personal property located in the United States (for example, cars and artwork).
If you are an NRNC, virtually all of your property located in the United States will be subject to federal estate tax at a 55% rate because the available exemption for NRNCs is only $60,000. Accordingly, if you are an NRNC, most estate tax planning techniques will involve the transformation of your U.S. property into foreign property through the use of foreign holding companies, foreign partnerships, foreign trusts, annuities, and life insurance contracts.
In today's global society, international boundaries are blurred more and more on business, financial, and personal levels. As a result, the fiduciary and tax laws of foreign countries impact virtually all individuals with a foreign connection, not just those with large estates. If either you or your spouse is not a U.S. citizen, or if you have property located in a foreign country regardless of your citizenship, you must include consideration of international law in your estate planning if you want the maximum amount of your property to be distributed as you intend after your death.
For further information regarding the issues described above, please contact a member of the Trusts & Estates practice: Virginia Carter, Eldridge Dodson, Zac Lamb, Gregory Peacock, John Sloan, Matt Thompson, or Peter von Stein.
This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.