Conference Call: Beyond Our Borders – Top 10 Multinational Issues in Estate Planning

We live in an increasingly global world. Today, many people travel regularly for work and pleasure, and have investments and loved ones abroad. From different law codes to increasing scrutiny from world governments, the complexities of estate and tax planning on an international scale are ready to ensnare the uninitiated. Whether you are a U.S. citizen with assets abroad, or a U.S. resident living overseas with ties back home, it is important to keep up to date on these multinational issues.

Recently, McManus & Associates held a conference call on multinational issues in estate planning, as part of its educational conference call series. Replay the discussion or read about it below!

LISTEN HERE for details: “Top 10 Multinational Issues in Estate Planning”

  1. After the Brexit Referendum: What We Know At Present
    1. Now that the shock of the UK referendum has passed, it is important to review some potential implications.  To join the EU, the UK had to revise its own laws to conform to EU law in order to facilitate the free movement of goods, services, and persons across one EU market.  Therefore, although it is not totally clear at this time, their departure could affect UK policy.
    2. The EU tax policy did not have much impact on a UK domiciled individual. However, EU regulations governing cross border transactions for corporate taxpayers will no longer apply.  The UK treaties with other countries dealing with double taxation of both non domiciled UK individuals and corporations may provide some structure for international taxation for these individuals and entities.
    3. For individuals, EU membership provides for their free movement to live and work throughout the EU.  Therefore, persons moving into and out of Britain will have to deal with residency issues and passport issues, and they could lose their right to stay in the UK to live and work.
  2. Assets Abroad: U.S. Clients with Non U.S. Assets
    1. U.S. citizens and resident aliens are subject to U.S. income and estate tax on their worldwide assets. A nonresident alien is taxed only on U.S. source income, including income connected with a U.S. business or capital gains from the sale of U.S. real property.
    2. The U.S. has signed estate tax and income tax treaties with many countries to avoid double taxation.
    3. Given the increased lifetime gift tax exemption, lifetime gifts of foreign assets are an option to reduce the burden of U.S. persons owning non-US assets.
    4. A nonresident alien planning to immigrate to the U.S. should consider purchasing U.S. real estate through a foreign corporation and making unlimited non-U.S. sitused gifts to U.S. persons (directly or in a foreign trust) prior to immigrating, so as to avoid estate and gift taxes.
  3. The Financial Fine Print: Compliance Beyond FBAR
    1. As we talked about during our previous discussion in May, U.S. citizens working overseas and foreign citizens considered residents have FBAR reporting obligations if the value of their foreign financial accounts exceed $10K at any time during the year. Please discuss this with us if you have any questions about FBAR or Voluntary Disclosure programs.Form 8938: Specified Foreign Financial Assets must be filed with your U.S. income tax return for foreign financial assets worth more than (i) $50,000 on the last day of the taxable year or $75,000 at any time during the year, for an unmarried individual living INSIDE the U.S.; OR (ii) $200,000 on the last day of the taxable year or $300,000 at any time during the year, for an unmarried individual living OUTSIDE of the U.S.
    2. Form 3520: A U.S. beneficiary receiving $100,000 or more in gifts/bequests from a foreign individual is required to file it by April 15 of the year following the gift. Otherwise, it may result in a 25% penalty of the total value on the gifts/bequests.
    3. Form 5471: U.S. persons (including a citizen, resident alien, domestic partnership or corporation, and a domestic trust or estate) who are officers, directors, or shareholders of a foreign corporation must file this form if they own or acquire 10% of a foreign corporation’s shares.
  4. Forethought for Families: International Guardianship
    1. The process through which the court appoints a third party to care for a minor’s welfare is complicated when the third party is a non-U.S. person living abroad. The courts work through a system of jurisdiction and have differing means to establish that jurisdiction over the non-U.S. individual.
    2. The client who wishes to appoint non-U.S. individuals as guardians must address this in a Last Will and Testament that names the guardians overseas AND temporary guardians in the U.S. to assist with the transfer. The temporary guardians will help to ensure that the children possess current passports, and assure their safe transfer to their appointed guardians.
    3. Without clear direction from the Will, a court may be reluctant to approve such guardians and restrict U.S. citizen children from exiting the country. NY courts will not appoint overseas guardians to serve alone, but will accept a co-guardianship structure with a guardian in the U.S. (specifically NY due to jurisdiction issues). NJ has a process whereby the international guardians must appear at the U.S. embassy or consulate abroad in order to qualify.
  5. Prepare for Heirs: Foreign Succession Laws
    1. Common law:  The legal system in most of the U.S. (except Louisiana), Canada (except Quebec), Australia, UK, New Zealand, and Ireland.
      1. In general, an individual can dispose his/her property to whomever through a Will or Trust.
      2. However, spousal elective share and dependent’s rights may limit an individual’s freedom to dispose his/her property.
    2. Civil law: All other major legal systems inspired by the Napoleonic Code (based on Roman law).
      1. Maintains forced heirship of assets.
    3. Sharia Law: There is considerable variety among Islamic countries as to its application, but in general it shares more in common with civil law with respect to succession laws.
    4. New EU Succession Regulation applies a single national law of succession to a person’s moveable and immoveable property upon death and applies to both testate and intestate succession and may avoid local forced heirship rules that would otherwise apply to property of a U.S. person in a civil law jurisdiction. (UK, Denmark, and Ireland are not parties to this regulation)
  6. Two Wills Are Better than One: Using Multiple Wills for Foreign Assets
    1. Some clients require multiple wills for each local jurisdiction.
      1. Advantages: no ancillary probate, wills can be tailored to a particular jurisdiction (movable and immovable property) and can reduce fees and expenses in countries that compute fees based on worldwide assets.
      2. Disadvantages: more expenses in legal fees to prepare the wills, increased complexity of estate plan as they need to complement each other in a coordinated fashion.
    2. Consider using multiple wills if:
      1. There is substantial real property or investments in privately owned companies in a foreign jurisdiction.
      2. There is difficulty in conducting an ancillary probate.
      3. There are expected disputes regarding the disposition of property
      4. The foreign country has not adopted regulations raising issues concerning the formal validity of international wills in that jurisdiction.
  7. Distinct Differences around the Globe: Civil Law Interpretation of Common Law Trusts
    1. While Common law recognizes trusts and trusts are regularly used in estate planning, most civil law countries do not recognize trusts.
      1. Japan and South Africa are isolated examples that do allow trusts by statute.
      2. Colombia and Lichtenstein recognize and enforce trusts as part of their domestic law.
      3. Some civil law jurisdictions allow the recognition of a trust if the trust is valid under the law of jurisdiction of the trust.
    2. While certain civil law jurisdictions may permit common law trusts to hold property under their jurisdiction, the trust may be subject to different tax treatment.
      1. In France, trustees are obligated to report the existence of trusts annually if any trust assets are located in France or if any of the beneficiaries are French residents. They are also subject to taxation upon the death of the settlor or if assets are transferred to beneficiaries by the trustees. (Friedman-Lederman)
      2. In Spain, distributions from trusts to residents are treated as being between third parties, which result in higher tax rates.
      3. Trustees who move to the UK will cause the trust to be a UK resident trust no matter where the income is earned, in which case it will be subject to UK income tax (at a 50% rate).
  8. Pros and Cons: Offshore Asset Protection Trusts
    1. Such vehicles are less popular due to closer inspection by the IRS with respect to unreported taxable income, however, offshore asset protection trusts are still viable for anonymity and creditor protection.
      1. U.S. courts have no jurisdiction to seize trust assets, which creates further obstacles for creditors with more legal costs to even have their claims heard.
    2. Foreign LLCs can also protect against creditors.
      1. While the client is appointed as Manager of the LLC, the client can appoint a foreign Trustee to oversee the assets in times of legal duress.
    3. The Hague Convention on Trusts has ensured the recognition and protection of trusts and their assets in certain foreign jurisdictions.
      1. Although the U.S. has not ratified the convention (the U.S. has only signed it), a U.S. person can still benefit from countries that have adopted it.
    4. As always, fraudulent conveyance or fraudulent transfer – an attempt to avoid debt by transferring money to another person or company – can render the foreign trust invalid for creditor protection.
  9. Dollars and Sense: Taxation of Foreign Trusts
    1. A trust where U.S. laws do not have jurisdiction AND where a U.S. person is not a trustee makes a trust a foreign trust for U.S. tax purposes.
    2. A foreign trust is treated and taxed as a U.S. person if there are U.S. beneficiaries or there is a U.S. grantor.
    3.  A foreign non-grantor trust with U.S. beneficiaries has Distributable Net Income (DNI), which is subject to income tax whether the income was distributed or not.
      1. Undistributed Net Income (UNI) will suffer “throwback rules,” which imposes heavy penalties when income tax is not paid.
      2. Foreign trusts can invest in tax exempt income or manage investments for capital appreciation only to avoid throwback rules, although the trustee must remain mindful about its obligation to diversify investments.
  10. Land of (Planning) Opportunity: Portability and the QDoT
    1. Portability permits the surviving spouse to use the Deceased Spouse’s Unused federal estate tax Exemption (“DSUE”) of their most recent deceased spouse, in order to increase the estate tax exemption amount.
    2. However, portability is only available to U.S. citizens and U.S. residents unless otherwise provided by treaty.
    3. In order to have similar tax benefits as a U.S. citizen, non-U.S. citizens or non-U.S. residents should establish a Qualified Domestic Trust (“QDoT”) to have the DSUE amount of the decedent included in the surviving spouse’s applicable exclusion amount, with some restrictions.
    4. QDoTs must be “maintained under the laws of” and “governed by the laws of” a particular state or the District of Columbia, and must include a U.S. Trustee.
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