How Should You Manage Foreign Tax Treaties in Your Estate Tax Plan? 

In today’s increasingly interconnected world, many multicultural and international families have assets around the world. Expats, U.S. citizens married to noncitizen spouses, global families splitting their time between the United States and other countries, and international investors in the United States all require estate planning strategies that take into account foreign tax treaties. 

High-net-worth individuals who fit this bill are particularly vulnerable to international taxation issues. These cross-border estate taxation issues make estate planning for global families complex and require thoughtful planning. An experienced Naperville, IL estate planning attorney can advise global high-net-worth families on implementing estate plans that manage foreign tax treaties and considerations. 

What Are Foreign Tax Treaties Affecting Cross-Border Estates?

The United States is currently a party to 15 estate or gift tax treaties with countries including Canada, Australia, France, Germany, Italy, Japan, the United Kingdom, and more. These treaties serve two main purposes. First, they help to determine how a cross-border estate will be taxed. Second, they tend to avoid double taxation, thus reducing the tax burden on the estate. 

How Do Foreign Tax Treaties Minimize Double Taxation?

Double taxation is a common issue when two different countries have potential taxation rights over an estate’s assets. The United States has entered into two main types of tax treaties. The treaty will determine which is the relevant country for tax purposes, either based on the individual’s domicile or on the country in which the assets are located (so-called “situs” treaties). Either way, when a foreign tax treaty exists, the agreement determines the one country that will be able to impose the taxes, thereby minimizing double taxation.

How Can You Manage Foreign Tax Treaties In Your Estate Plan?

Foreign tax treaties and foreign estate planning considerations add additional complexity to the estate planning mix. An experienced estate planning attorney will craft your estate plan to maximize the benefits of any foreign tax treaty, including ensuring the following: 

Claiming the Tax Treaty Benefits

In order to claim any benefits that the foreign tax treaties provide in terms of avoiding double taxation, the estate must disclose the worldwide asset value on the U.S. estate tax return and fill out a form titled Treaty-Based Return Petition Disclosure in order to claim the tax treaty benefits. This form must be filed alongside the estate tax return. 

Evaluate the Tax Outcome 

It is important to weigh the effect of the relevant country’s tax laws, the United States’ tax laws, and the pertinent tax treaties on your estate plan. Your attorney will consider whether the treaty determines taxation based on asset location or domicile, and craft your estate plan accordingly. 

Include a “Geographic Will”

If you are drafting a will as part of your estate plan, consider creating several “situs” wills, which will each determine how you wish your assets to be distributed in each of the countries in which you are executing a will. You should ensure that the wills work seamlessly together with each other and the rest of the estate plan. As another option, a “geographic will” can take into account the laws of all relevant countries.

Review Your Estate Plan

As a general rule it is a good practice to periodically review your estate plan, and this is especially true for international families. Particularly after a move abroad, your estate planning attorney should examine the estate plan keeping in mind that estate planning strategies that might work in the United States may not work abroad. Likewise, international families should consider the ramifications of keeping significant assets or establishing domicile in a country that does not have a tax treaty with the United States. 

Consider International Estates and Trusts Laws 

With cross-border estate plans, international families should understand the differences in the relevant countries’ laws and how this may affect the estate plan. For example, the United States has an estate tax, while many countries have an inheritance tax. An inheritance tax is imposed on the person who receives the assets rather than on the estate, changing estate planning considerations significantly. Global families residing in countries with inheritance taxes should formulate estate plans that also protect the beneficiaries of the estate. 

Consider Residency and Domicile Rules

Residency and/or domicile are generally used to determine how taxes are imposed. For this reason, global families should review the rules of the relevant countries to understand how the country determines domicile for estate tax purposes. 

Be Careful With Trusts

Trusts can be a flexible and effective estate-planning tool but may run into issues internationally. Some countries’ estate laws directly conflict with the ways that trusts work in the United States. For example, in some countries, the trust may be taxed when the individual establishes their new country of residence. Trusts may also be in place for a period longer than the applicability of a tax treaty, exposing the estate to significant double taxation after the treaty phases out. 

Some countries may not even recognize a particular type of trust, exposing the assets to significant taxes. Other trusts may be subject to taxes specifically imposed on trusts holding certain types of property. The solution is to consider the relevant country’s laws and ensure that any trust will work as intended in that particular country.

Give 529 Plans and Similar Gifting Strategies a Second Thought

529 educational plans are a common way of reducing the value of an estate. The grantor deposits assets as a gift into 529 plans that have significant tax advantages while providing the gift of money for education. Yet many countries do not recognize such plans, meaning that the gains on the investments here would be subject to taxation. 

Call a Naperville, IL Estate Planning Attorney

International families face complex cross-border estate planning issues that, if left unplanned, could cause serious financial consequences. At the Gierach Law Firm, Attorney Denise Gierach takes this into account when representing high-net-worth families with every aspect of estate planning. The experienced Naperville, IL estate planning attorney understands the complexities of crafting estate plans for international clients. She works with high-net-worth global clients to ensure that foreign tax treaty considerations are incorporated into estate plans. Call the law firm offices at 630-756-1160 to set up a consultation.