| Have you thought about your foreign held assets in your estate plan? |
It is somewhat surprising how often individuals fail to disclose foreign assets to their estate planning advisors. They assume that these assets are not relevant to their “U.S.” estate plans, so they are not worth mentioning. But if a person owns real estate or other assets outside the United States, it is critical to address these assets in his or her estate plan.
Watch out for double taxation:
If you are a U.S. citizen, you are 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 is 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 are not available.
Keep in mind that you are 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 have 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 are not a U.S. citizen, you may be subject to U.S. gift and estate taxes on your worldwide assets if you are 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 are 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 lifetime federal gift and estate tax exemption is up to $11.7 million ($23.4 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 is always a chance that lawmakers Will reduce them earlier. So even if your estate is well within current exemption amounts, it is 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.
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, 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 is important to work with local counsel in each foreign jurisdiction to ensure that the Wills meet each country’s requirements. And it is critical for your U.S. and foreign advisors to coordinate their efforts to ensure that one Will does not 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 is common for U.S. Wills to provide for all assets to be transferred to a trust.
Be aware, however, that many countries do not 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 your estate planning advisor 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 are considering purchasing foreign assets, consult your advisor before you buy. He or she 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 are located.