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International Estate Planning: 5 Key Issues for Cross-Border Families to Consider

Estate planning can be a complicated process for cross border families. Be sure to consider these key factors when making an international estate plan.

Many families put off estate planning until later in life, thinking the responsibility can wait. Unfortunately, this way of thinking can leave a lot unaccounted for. When it comes to international estate planning, in particular, families need to think ahead and address how they want to manage their future financial affairs. 

Each country has their own tax codes and estate planning requirements. Failing to take these into consideration can leave your Estate vulnerable to lengthy court proceedings, incorrect inheritances, and high tax requirements -- in some cases across multiple countries. If your family lives or works in more than one country, take time to learn about cross border estate planning today:

  • Why is international estate planning important for cross border families?

  • 5 key issues when estate planning with foreign property

  • Enlist the help of a professional to create an international Estate Plan

Why is International Estate Planning Important for Cross Border Families?

International estate planning is important for cross border families because of the legal challenges and tax implications associated with living in multiple countries. Think about the many purposes of an Estate Plan: to protect loved ones, preserve family legacies, reduce excessive tax obligations, and minimize legal processes. Now, think about navigating each of these concerns in more than one country. 

The challenge is that the laws surrounding inheritances, probate, and gift taxes are specific to each country. Even within the United States, there are different laws governing these processes for citizens and green card holders. Failing to take these differences into account can lead to unplanned excessive taxation, among other difficulties.

Country-specific laws on estate planning can also prevent individuals from choosing who to pass their assets down to; regulations that are typically referred to as “forced heirship”. Essentially, these laws require assets to pass down to blood relatives or next-of-kin (though the specifics vary by country). This can result in assets transferring to the wrong beneficiaries, lengthy court proceedings, and in some cases the loss of certain assets. 

While estate planning will not override international law, it can help you prepare yourself, your loved ones, and your financial affairs for the future. There is an extra degree of responsibility that goes into International Estate Plans, as the consequences of navigating probate in multiple countries can be challenging legally and financially. By addressing the many complexities of international estate planning now, you can avoid these challenges.

Can You Create a Cross-Border Trust?

A Cross-Border Trust (CBT) is a type of Revocable Trust that is created with the purpose of managing assets between the U.S. and Canada. Assets within the Trust can be transferred to the named beneficiaries without passing through probate. The benefit of this arrangement is that it can help cross border families avoid double taxation on their property. 

You can create a Cross-Border Trust with the help of an estate planning lawyer, provided the establishment of the Trust is done within the regulations of CBTs. This arrangement is not designed for everyone, however, and families may still need to consider other options when creating an international Estate Plan. In some cases an offshore or foreign Trust may be more beneficial. 

5 Key Issues When Estate Planning with Foreign Property

There are certain components distinct to international Estate planning that can be important to understand before getting started. By reviewing these issues now, you can learn what to avoid in the future. Read through the following key issues when estate planning with foreign property to learn more. 

1. Pay Attention to Nationality, Residency, Domicile and Situs Rules

Nationality, residency, and domicile are the basis of international estate planning. These factors dictate which jurisdictions have control over your Estate and how it is handled. Without proper planning, multiple countries may exercise control over the management of an Estate -- which can be both costly and time consuming.

For legal purposes, nationality refers to the country in which one holds citizenship. Each country has its own laws governing its citizens, regardless of where they live or work. For example, an American living abroad in France will still be subject to U.S. Estate and gift taxes based on citizenship status. Nationality also has an impact on inheritance laws and who can be named as a beneficiary, such as the forced heirship laws mentioned above. 

Residency refers to the country where one lives, whether that be full or part-time. While a domicile is the place of one’s permanent legal home. Let’s say you attend a university in China, but typically reside in the U.S. Your residency for part of the year would be in China, but your domicile would remain in the U.S. These differences are important to consider because they determine at which point you will be subject to local Estate and gift tax laws. 

What is Situs?

Situs is a term used to describe the legal jurisdiction an item belongs to, or its place of origin. It is often used in an estate planning context to describe U.S. based real estate or shares in U.S. companies, though other countries use this term as well. Situs can also be referred to as “situs property” or “U.S. situs.”

Consider a Mexican family with a vacation home in California. While the family resides predominantly in Mexico, their vacation property would be considered U.S. Situs. This means it would be subject to U.S. taxes and other laws. Situs property is an important consideration for international Estate Plans because it can help individuals identify the best strategy for transferring assets. 

2. Consider Gift Tax Law

Gift tax laws go hand in hand with estate planning and are highly important for those managing high-value Estates. Gift taxes are incurred anytime you transfer assets or money to an individual without payment in return (beyond the annual limit of $15,000). Once this amount is met, you begin deducting from your lifetime gift tax exemption -- which is also used to determine your Estate Taxes. 

The reason this is important to international estate planning is that you can’t simply transfer your money and assets away in old age to avoid paying taxes. Just like with Estate tax laws, each country has their own gift tax regulations to be aware of. While the U.S. has a large lifetime exemption ($11.7 million) many other countries have much lower thresholds. 

It is also important to be aware of International Estate and gift tax treaties, which can help alleviate the costs associated with cross border Estate Plans. Currently, the U.S. has Estate tax treaties with 15 countries, and gift tax treaties with seven. These treaties can provide certain protections to citizens with assets in both countries.

3. Confirm Funding of Your Trust

Trusts are a core component of estate planning, especially for international families. They can be a helpful way to avoid excessive taxation and ensure the successful distribution of assets. However, Trust planning will look slightly different for foreign citizens living in the U.S. If you opt to create a Trust as part of your Estate Plan, understand that funding and location are important. 

A U.S. based Trust is one option for passing down assets to U.S. citizens, though the Trust must be funded with foreign assets. The purpose for this is to avoid triggering the Estate tax, which would otherwise be incurred. Further, consider the right state to open the Trust in. Many international citizens choose Delaware for its extensive privacy and protection laws. 

4. Understand the Jurisdiction in Which the Decedent and Assets are Situated

The key to successful cross border estate planning is to understand the jurisdiction of the decedent and their respective assets. (Decadent meaning the individual who has passed away.) These are the laws that will have the most immediate impact on how the Estate is managed and taxed. Both foreign citizens living in the U.S. and American citizens living abroad need to carefully consider how differences in Estate law could impact their finances. 

The U.S. is somewhat unique in its succession laws, which allow citizens to choose who to leave their assets and belongings to. While there are certain laws regulating next-of-kin when someone dies without a Will, Americans have a large degree of freedom in creating domestic Estate Plans. Americans living abroad should be aware that many countries around the world regulate who can inherit certain assets. These countries include Japan, Brazil, France, Italy, Saudi Arabia, and many other civil law countries. 

Another important consideration is how Estates are taxed around the world. In the United States, taxes are taken from the decedent's Estate during the probate process. In many other countries, taxes are incurred by the person receiving the inheritance. What this means is that if certain beneficiaries live in a country with inheritance tax laws, your U.S. based assets could face double taxation. For example, if you live in Turkey and inherit a large sum of money from your grandmother in the U.S., that money could be taxed in both countries. First, the money would be subject to Estate Taxes in the U.S. Then, it would incur inheritance taxes after you receive it in Turkey. 

This is just one of countless scenarios where an international Estate Plan is crucial. No one is expected to know the Estate laws that govern each country around the world, but it is important to understand that there is a wide amount of variation depending on where you are. There are legal entities and financial structures that can help arrange your affairs as needed, no matter which countries your family lives in. 

5. Understand Rules Around Owning & Transferring Real Estate

Real estate is a somewhat challenging addition to international Estate Plans, specifically when it comes to tax reduction strategies. The reason is for this is because the transfer of U.S. real estate can be subject to income, Estate, and gift taxes. If the property is sold after ownership is transferred, the transaction can then result in capital gains taxes. 

One common way to reduce these taxes as real estate changes hands is to establish a U.S. based Trust to purchase the property. Then, you can name your beneficiaries on the Trust. This can help the property avoid Estate and gift taxes when it is inherited, though when sold it will still be subject to capital gains taxes. This solution is often best suited to families who want to ensure that real estate is passed down or who plan to live in the property for a long time. 

International estate planning can be tricky to navigate, particularly when it comes to transferring ownership of real estate. Each situation will warrant a unique solution, often determined by your and your family’s long-term goals in the country. Be aware that this process can become even more complex with commercial or income-generating real estate. 

Enlist the Help of a Professional to Create Your International Estate Plan

As more and more families navigate global living, international estate planning is becoming increasingly important. While the U.S. has Estate-related treaties across the world, failing to plan ahead can leave your loved ones and your legacy vulnerable. Families risk losing time, money, and even personal belongings by failing to plan ahead.

That being said, the complexities of an International Estate Plan make the creation process seem daunting, if not impossible. After all, how are you supposed to know how international laws will impact your Estate? This is where the help of a qualified professional comes in. By working with our estate planning team, you can navigate the many challenges of creating an International Estate Plan with ease. 

The importance of estate planning cannot be understated, especially when it comes to cross border families. There are countless international laws, treaties, and tax codes to be aware of depending on where you and your loved ones reside. The best way to navigate this process is with the help of a trusted professional. International estate planning may not be as simple as creating a domestic plan, but the benefits can last for generations. 

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