Posted On: AUGUST 2020
You’d be surprised how often people fail to disclose foreign assets to their estate planning advisors. They assume that these assets aren’t relevant to their “U.S.” estate plans, so they’re not worth mentioning. But if you own real estate or other assets outside the United States, it’s critical to address these assets in your estate plan.
If you’re a U.S. citizen, you’re subject to federal gift and estate taxes on all of your worldwide assets, regardless of where you live or where your assets are located. So, if you own assets in other countries, there’s a risk of double taxation if the assets are subject to estate, inheritance or other death taxes in those countries. You may be entitled to a foreign death tax credit against your U.S. gift or estate tax liability — particularly in countries that have tax treaties with the United States — but in some cases those credits aren’t available.
Keep in mind that you’re considered a U.S. citizen if 1) you were born here, even if your parents have never been U.S. citizens and regardless of where you currently reside (unless you’ve renounced your citizenship), or 2) you were born outside the United States but at least one of your parents was a U.S. citizen at the time.
Even if you’re not a U.S. citizen, you may be subject to U.S. gift and estate taxes on your worldwide assets if you’re domiciled in the United States. Domicile is a somewhat subjective concept — essentially it means you reside in a place with an intent to stay indefinitely and to always return when you’re away. Once the United States becomes your domicile, its gift and estate taxes apply to your assets outside the United States, even if you leave the country, unless you take steps to change your domicile.
Now that the federal gift and estate tax exemption is up to $11.58 million ($23.16 million for married couples), you may not be concerned about U.S. gift and estate taxes. But remember, the exemption amounts are scheduled to revert to their pre-2018 levels of $5 million and $10 million, respectively (indexed for inflation) as of the beginning of 2026. And there’s always a chance that lawmakers will reduce them earlier. So even if your estate is well within current exemption amounts, it’s a good idea to plan for a potential estate tax bill down the road. Further, for married couples, the rules are different – and potentially a lot more complex – if one spouse is neither a U.S. citizen nor considered a resident for estate tax purposes.
To ensure that your foreign assets are distributed according to your wishes, your will must be drafted and executed in a manner that will be accepted in the United States as well as in the country or countries where the assets are located. Often, it’s possible to prepare a single will that meets the requirements of each jurisdiction, but it may be preferable to have separate wills for foreign assets. One advantage of doing so is that separate wills, written in the foreign country’s language (if not English) can help streamline the probate process.
If you prepare two or more wills, it’s important to work with local counsel in each foreign jurisdiction to ensure that the wills meet each country’s requirements. And it’s critical for your U.S. and foreign advisors to coordinate their efforts to ensure that one will doesn’t nullify the others. Also, keep in mind that some countries have forced heirship or similar laws that can override the terms of your will.
A typical U.S. estate plan uses one or more trusts for a variety of purposes, including tax planning, asset management and asset protection. And it’s common for U.S. wills to provide for all assets to be transferred to a trust.
Be aware, however, that many countries don’t recognize trusts. So, if your estate plan transfers foreign assets to a trust, there could be unwelcome consequences, including higher foreign taxes or even obstacles to transferring the assets as intended.
If you own foreign assets, talk to us as soon as possible about steps you can take to ensure that those assets are distributed in accordance with your wishes, and in the most tax-efficient manner possible. And if you’re considering purchasing foreign assets, consult with us before you buy. We can help you structure ownership of these assets in the optimal manner, in accordance with the laws of the United States and the country where they’re located.
For foreign citizens living in the United States, estate planning can be complicated. One source of confusion is the difference between residency and domicile. If you’re a U.S. resident — which is based on the amount of time you spend in the U.S. — you’re subject to U.S. income taxes on your worldwide income. But resident aliens aren’t subject to U.S. gift and estate taxes unless they’re domiciled in the U.S. You can be a resident without being a domiciliary, although residency is a factor in determining domicile.
If you’re not a U.S. citizen or domiciliary — that is, if you’re resident alien who’s not domiciled in the United States, or you’re a nonresident alien — then U.S. gift and estate taxes will not reach your assets outside the United States. However, you’ll be subject to those taxes on assets that are “situated” in the United States, including real estate and certain investments in U.S. businesses. And unlike the $11.58 million allowed to U.S. citizens and domiciliaries, the estate tax exemption amount is a paltry $60,000.
Under those circumstances, life insurance can be an effective way to cover estate taxes on significant U.S. assets because, for those who aren’t U.S. citizens or domiciliaries, life insurance proceeds are excluded from their taxable estates.