It is always critical to communicate your foreign assets to your estate advisors. Often, people think they don’t matter since they are outside relevant U.S. estate plans. On the contrary, these assets might run the risk of double taxation.
Watch Out For Double Taxation
If you’re a U.S. citizen, you’re subject to federal gift and estate tax on all of your worldwide assets, regardless of where you live or where the assets are located. 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:
- 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 tax 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.
One Will May Not Be Enough
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. However, 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 critical for your U.S. and foreign advisors to coordinate their efforts to ensure that one won’t nullify the others.
Your U.S. estate plan may use one or more trusts for a variety of purposes, including tax planning, asset management and asset protection. And your U.S. will may provide for all assets to be transferred to a trust.
However, be aware 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 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.