While end-of life planning may seem morbid, an estate plan can protect you not just when you die but also during your life. International estate planning is not just for the wealthy individuals: without a plan, the distribution of your international assets may lead to disputes with countries’ agencies, conflicts within your family and excessive costs. Below 5 tips to assist you in your estate planning.
What is an international estate plan?
An international estate plan is a collection of documents & processes that arrange for the management and/or disposal of your assets – in preparation for your future incapacity or death. Below are some of the key steps to preparing an international estate plan:
- Inventory of your assets = prepare a list of the assets that you own worldwide.
- Inventory of your liabilities = prepare a list of loans, mortgages, and tax obligations.
- Beneficiaries = determine your beneficiaries
- Distribution = determine what each beneficiary will receive.
- Incapacity = designate a person to manage your finances (Durable power of attorney) and to make medical decisions (Health care directive) – should you become incapacitated
- Taxation = consult with professionals in each country to understand the tax rules that will apply to your assets
To know more about US tax rates: https://kbfinancials.biz/tax-rates/
How is an international estate taxed?
US persons are subject to estate tax on their worldwide assets. For estate tax, a US person is a person who lives with the intent to stay in the US before her death (“domicile”). Non-residents are subject to estate tax only on their assets physically located in the US (“U.S. situs assets”). For example, real property located in the United States is considered “US situs”.
In the US, estate taxes are paid from the estate before the assets are distributed to the beneficiaries. The executor of the estate is responsible for ensuring that all taxes are paid from the estate.
To know more about the tax filings of an estate for a US person: https://www.irs.gov/forms-pubs/about-form-706
To know more about the tax filings of an estate for a non-US person – https://www.irs.gov/forms-pubs/about-form-706-na
Tip #1: Consider a single will vs multiple wills
In the US, a will provides written directions on how you wish to distribute your assets upon your death / disability. In the absence of a will, the state’s intestacy laws and the courts will decide how your assets are distributed (“probate“).
When you own assets in multiple countries, you have 2 options: multiple wills (one in each country) or a single will (Hague Convention international will). If you decide with multiple wills, you need to make sure each will does not contradict the others. With a will in each country, the distribution of your estate will likely be easier as each document will be redacted in the country’s language and rules. If you decide on the international will, make sure that both countries recognize the Hague convention will.
To know more about the international will: https://www.unidroit.org/instruments/international-will/
Tip #2 – Assign “designated beneficiaries” to your assets
Assets that have been assigned designated beneficiaries will not go through probate and as a result will be distributed to beneficiaries faster and with less expenses. If you would like to designate beneficiaries, contact your financial institutions and assign payable on death (“POD“) to your bank accounts and transfer on death (“TOD“) to your brokerage accounts.
Tip #3 – Restructure ownership of your assets
Assets held in a US entity do not go through probate and as a result can be distributed faster and with less expense. If you would like to restructure ownership, you can set up a business entity – such as an LLC or a Corporation. Once set up, the entity does not terminate upon your death : your assets continue to exist in the entity after your death.
To know more about the benefits of business entities: https://kbfinancials.biz/investir-aux-usa-les-5-avantages-de-la-structure-juridique/
Tip #4 – Maximize tax free transfers
In the US, 2 types of transfers will allow you to pass on your wealth tax free:
1/ Tax free transfer between spouses (“marital deduction”) = transfers between 2 US citizen spouses are free of estate tax. Transfers between one US spouse and a non-US spouse are subject to the Estate tax treaty between the US and the other country (if applicable).
2/ Tax free transfer between parents & children (“unified tax credit”) = transfers between US parents and US children are free of estate tax up to $12m (tax year 2022). Transfers between one US parent and a non-US child – or vice versa – are subject to the Estate tax treaty between the US and the other country (if applicable).
To know more about tax treaties: https://kbfinancials.biz/the-4-benefits-of-an-income-tax-treaty/
Tip #5: Review your plan regularly
With time, your personal situation might change: you might marry, divorce, have children, sell assets, acquire assets, or move to another country. When those events happen, you will want to update your estate plan. In addition, tax laws change overtime and a structure of your asset that was beneficial a few years ago, might no longer be.
To know more about other tax-free gift strategies: https://kbfinancials.biz/6-tax-free-gifts/
As always, bear in mind the date of this article as tax laws change over time
For assistance with your international tax needs, please contact Karine Bauer, EA, JD – HERE.
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Updated August 10th, 2023