It may be a case of "out of sight, out of mind." Some wealthy individuals who own overseas assets forget to mention them to their estate plan advisors. The reasons vary, but many erroneously believe that assets such as foreign real estate aren't relevant to their estate plans in the United States. This isn't the case. Here's what you need to know.
Who's Subject to the Law?
If you're a U.S. citizen, you're subject to federal gift and estate taxes on all of your 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.
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
- 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.
For 2021, the federal gift and estate tax exemption is $11.7 million ($23.4 million for married couples). So 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.
Solutions for Foreign Citizens
Estate planning can be particularly complicated for foreign citizens living in the United States. 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. However, 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 — for example, if you're a resident alien who's not domiciled in the United States, or you're a nonresident alien — then U.S. gift and estate taxes won't 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 $11.7 million allowed to U.S. citizens and domiciliaries for 2021, the estate tax exemption is a paltry $60,000. Under those circumstances, life insurance may be an effective way to cover estate taxes on significant U.S. assets because life insurance proceeds are excluded from their taxable estates.
How Many Wills Do You Need?
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 legal 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.
What About Trusts?
Some U.S. estate plans use 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. This could include higher foreign taxes or even obstacles to transferring the assets as intended.
Tax Efficiency Is Important
Work with our estate planning advisors to ensure foreign assets are represented in your estate plan and will be distributed according to your wishes, in the most tax-efficient manner possible. They may also be able to help if you're buying foreign assets by, for example, structuring ownership for favorable tax treatment.
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