A major concern for families when it comes to estate planning relates to taxes, both gift and estate taxes. If you are an American citizen living abroad then you need to know the requirements of any country where you live, own property, or work when it comes to taxes. If you created an estate plan here in the United States years ago then it's unlikely that this plan will be effective in the country where you are living right now. Another factor for you to consider is the degree to which you have spent money, built wealth, or purchased property in your adopted country.
For income tax purposes, the United States has a test to determine whether a non-citizen is a resident to figure out their income taxes. This test is known as the substantial presence test. It measures the total number of days of a tax year that the person was physically located in the United States. If you are a citizen, then you are always considered to be a resident of this country to assess income tax liabilities. Green card holders are also considered to be residents of the United States when it comes to income taxes unless an election to do otherwise is made.
If you are domiciled in a particular country, then you live there without the intention of leaving in the future. Where you are domiciled makes a difference for transfer tax purposes. Being a resident in a location does not necessarily mean that you are also domiciled there. Once you create a domicile in the United States then you will need to move outside the country and an intent to remain outside the US to break that domicile distinction. The way an immigrant to the United States becomes susceptible to estate tax exposure is if he or she moves to the United States and does not have the intent to leave later. Your domicile as an immigrant can be more difficult to determine and several factors are relevant to that discussion.
Transferring property to a spouse as an immigrant
The location of the property that you seek to transfer is important for determining tax purposes. United States citizens and residents are exposed to a federal estate tax on assets located around the world. On the other hand, an immigrant who is not a citizen can only be taxed on property located in the United States. For that reason, it is important to determine where the property that you own is located. For some families who spend time both in the United States and in a foreign country, this is an especially important topic to learn more about.
An interesting aspect of this discussion relates to how intangible property is treated by an immigrant non-citizen. In some instances, the federal gift tax will apply to intangible property which is not located in the United States. In other cases, an estate tax can apply for certain property, but a gift tax would not apply. When you get into the specifics of matters like this you need to be able to work with an experienced estate planning attorney as well as a tax professional who can guide your goals.
Real property like land and structures located on that land in the United States is taxable for estate tax purposes. Personal property that is physically located in the United States is treated the same way. Intangible property like investments and bank accounts are also susceptible to being taxed for estate purposes but it will depend on the kind of the particular investment.
How can you effectively plan your estate as an immigrant?
The most straightforward estate planning tool that you as an immigrant or any other person in the United States can use is a will. A will instruct an executor on how to distribute property according to his or her wishes. Depending upon your residency or citizenship status a will can provide you with autonomy on how to divide property amongst your family, friends, or anyone else for that matter. The alternative is to have a probate court judge follow the Texas Estates Code when dividing property among your family members.
Trusts are another estate planning vehicle that may be of use to you. A trust allows you to place property inside of one where a trustee is charged with maintaining the property and ultimately distributing the property upon your death or at other predesignated times. A trust carries with it the same autonomy advantages of a will and additional tax advantages. Property contained in a trust does not have to be distributed through the probate process, either.
Life insurance is a non-probate method of transferring propriety, albeit in an unorthodox manner. Life insurance is designed to pay a stated amount of money upon your death. Additionally, different types of life insurance policies also offer the opportunity to invest your premiums in different investment vehicles offered within the life insurance policy.
A financial planner is a good person to have on board while you are involved in estate planning. This is a person who can advise you on investments and strategies for maximizing wealth based on your goals and the characteristics of your family. However, you need to pay close attention to the types of estate planning that you have become involved in especially if you are a United States citizen who has left the country to live abroad. Before you decide to leave the country and live elsewhere you should review your estate plan documents with an experienced estate planning attorney. Even if you go through a divorce, it is a good idea to review your estate plan.
How a will can be particularly effective when it comes to international estate planning?
As we just discussed, a will is the most common method of estate planning for US citizens and other people who reside in the United States. How you wish to have property from your estate distributed upon your passing is what is contained within a will. Every state in the United States has different laws for how to create a will that is valid and enforceable within probate court.
There are three basic requirements for a will to be considered valid. You must first be competent to create and enter a legal document like a will. That means that you must be mentally sound and not under the influence of drugs or alcohol. You must also be found to not be under the influence of another person or entity in the planning of your will. Fraud or duress must not have been factors that caused you to enter the will. Your will must clearly describe the property that needs to be distributed and needs to be witnessed by two people if your will is being created in Texas.
Especially when it comes to families like yours who frequently cross between the United States and another country, it is a good idea for you to work with an attorney who can focus on estate planning here and may be able to help point you in the right direction as far as how to handle estate planning matters in the foreign country. An experienced estate planning attorney with the Law Office of Bryan Fagan has helped people create estate plans for property located within and outside the United States, for example. You may need to create two wills, for example, with the help of an attorney located in your home country.
Planning to move with property in trust? Beware.
Having a plan to move out of the United States with all or even some of your property in a trust is a risky move. While your trust is a time and legally-honored way to estate plan here in the United States, in foreign countries it is not necessarily the case that this is true. If you have set up a trust with you as the grantor on behalf of your children then you should consider whether moving abroad is a good idea. It could be that this trust is going to be taxed separately once you move to another country. Since so much of the benefit of a trust is avoiding taxes then this is a major drawback of living internationally with the trust.
Let's consider a situation where you move to a European country with your family. Your children, who are the beneficiaries of the trust, would be residents of the European country that you move to. The intentions of you and your spouse in creating the trust would conflict with the gift and inheritance tax laws of your new home. Once property begins to be distributed out of that trust, it may be taxed at an even higher rate given that taxes in European are generally higher than they are in the United States. Certain European countries, like Germany, have treaties with the United States that will blunt the impact of these taxes for a period. However, if you and your family remain in the European country for more than ten years then distributions from that trust can be exposed to gift taxes that in some cases are as high as fifty percent.
European countries and certain Latin American countries have complicated and convoluted tax programs that require documentation of any assets contained in a trust which are in that foreign country. If you are domiciled in this country, then those reporting laws would apply to you and your family. These countries have systems of law that are different from the United States and are not compatible in many cases with trusts. There are examples of reforms occurring in these countries that can make it easier to own a trust as an American living in a foreign country but that is not always the case.
What can you do to reduce the size of your estate from a taxes perspective?
Commonly referred to as "529 plans", college savings plans have become more popular in recent years given that parents like the idea of investing in their child's college savings in a tax-beneficial way. There are advantages to saving big chunks of money for college as early as possible for your child. Allow the interest growth on those investments to do the work rather than having to scramble while your child is a teen and needs to pay for college soon. 529 accounts are offered through the State of Texas in addition to other states around the country. It is possible to invest in 529 plans even if you are not a resident of that state.
This is a good thing for parents, but what if you are a grandparent who is looking to help your grandchild with college savings and reduce the size of your taxable estate? A 529 plan is a great vehicle for you to be able to kill two birds with one stone. Some taxes would otherwise go into effect if, for example, you tried to skip over your children and instead pass money down to your grandchildren. A 529 is not susceptible to this type of tax. So, the 529 offers unique tax saving and growth opportunities for your money, simultaneously. Not only that, but many 529 plans allow you to maintain a great deal of autonomy over the investments that you put your money into.
Living in a foreign country means understanding the consequences of having a 529 as far as taxes on the gains for these accounts. While growth on a 529 account is tax-free in the United States, that is not true in any other country. The US does not have a treaty with any foreign country that allows this tax-free growth to be maintained for citizens living abroad. In this way, a 529 plan that was designed to gift money to children or grandchildren may not be so advantageous when you consider the tax circumstances of living abroad simultaneously. An idea may be to have a relative living in the United States open and maintain the account for your children or grandchildren.
What if your spouse is not a United States citizen?
If you need to engage in some estate planning but your spouse is not a United States citizen, then you should pay close attention to the information that we provide here. If you have lived in another country, you may have worked, earned an income, and found the love of your life. In that case, you need to know the tax ramifications that are inherent in marrying a person who is not a United States citizen.
For starters, there is no unlimited marital deduction when it comes to gift taxes if your spouse is not a citizen. This is true even if your spouse gets a green card or has any other residency designation through the government. You can engage in lifetime gifts to your spouse who is not a citizen to get around the deduction does not apply to you or your spouse. You can give an unlimited amount of property to your spouse if he or she is a citizen but there is a limit that applies to tax-free gifts to non-citizen spouses. Keep in mind that any gifts that you give to your spouse like this should be documented well and run past a tax expert and/or financial planner.
A qualified domestic trust may also be just what the doctor ordered as far as taking into account the circumstances that you and your spouse find yourselves in. Your surviving spouse can use income and property for your estate during their lifetime. The assets in this trust would then pass to your heirs after your spouse passes away. Only the distributions from the principal during your spouse's life and at the time of their death are subject to estate taxes. Once the property is distributed to your heirs (who are citizens of the United States) then the estate tax would become relevant.
Closing thoughts on estate planning for multinational families
If you and your spouse are either not citizens of the United States, are living abroad, or have some combination of these two circumstances then you need to consider your options when it comes to planning your estate. The type of assets that you own, where these assets are located, the value of these assets as well as your goals for financial and estate planning are all relevant considerations. No matter what you want to do with your money you need to have a plan. Reaching out to one of the experienced estate planning attorneys with the Law Office of Bryan Fagan is a great place to start if you need to build a plan and get structures in place to protect the property that you have worked so hard to build.
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