Proper planning is necessary to avoid unintended outcomes.
You may live by the motto, “outta sight, outta mind,” but don’t apply that line of thinking when it comes to your assets. This is particularly true when accounting for foreign assets in your estate plan.
Double taxation risk
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, but 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.
Consider drafting more than one will
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 countries where your 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, work with local counsel in each foreign jurisdiction to ensure that they meet each country’s requirements. And it’s important 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.
Beware transferring foreign assets to a trust
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.
Turn to the professionals
Accounting for all of your assets — especially any foreign assets — in your estate plan is important. Thus, planning is best left to the professionals. Your estate planning advisor can help structure ownership of any foreign assets according to the laws of the United States and the country where they’re located.