The Complexities of Transferring Wealth as a U.S. Expat
Efficiently transferring wealth to the next generation is difficult, regardless of where you live. However, it becomes especially difficult when you’re living overseas, due in part to the complexities of navigating multiple tax jurisdictions.
Following are several important considerations to keep in mind as you make a plan for transferring your wealth while living overseas.
#1 – Tax complexities
As a U.S. citizen, you’re taxed by the United States on your worldwide assets, regardless of where you live. Your current country of residence may also impose estate taxes and/or inheritance taxes, which may put your estate at risk of double taxation. Fortunately, some countries have tax treaties with the United States that mitigate this double taxation risk. Your international wealth manager can help you navigate these tax complexities and take advantage of any existing tax treaties as you make a plan to transfer your wealth to the next generation.
#2 – Estate laws of multiple jurisdictions
As you’re updating your estate plan, it’s important to understand how the estate laws of multiple jurisdictions may impact your strategies. Consider:
- U.S.-based wills – A will drafted in the United States may not be recognized or effective in your new country of residence, which can present challenges for your heirs should you pass away while living abroad. Your international wealth manager and estate planning attorney can help you determine whether it makes sense to implement an additional “situs” will to govern the distribution of assets held overseas.
Another option is to create a multi-jurisdictional will to cover property held in multiple countries. If you decide to go this route, be sure to work with an experienced international estate planning attorney who’s able to address the complexities of both countries’ succession laws. Doing so can help ensure the provisions of your will are accepted across all jurisdictions. - U.S.-based trusts – U.S.-based trusts typically don’t operate as intended once the tax and probate laws of another country come into play. It’s important to work with an international wealth manager and estate planning attorney to evaluate the appropriateness of any trusts currently included in your estate plan. Non-U.S. estate plans generally don’t include trusts, which means, without a plan in place, you may face immediate tax and reporting consequences during your lifetime.
- Domicile – Depending on your state’s definition of “domicile,” your estate may be subject to state-specific estate and inheritance laws, which may include additional tax liabilities. If you plan to reside overseas for the remainder of your lifetime, it may make sense to end your state residency in order to avoid additional estate planning complexities.
- Forced heirship – Forced heirship refers to rules that mandate a portion of an estate must go to certain heirs, such as children or a spouse. Forced heirship is common in countries with civil law systems, such as France, Spain, Germany, Japan, Saudi Arabia, etc. These forced heirship rules can override your wishes if they’re not directly addressed in your estate plan.
As with many estate planning provisions, forced heirship rules vary greatly by country, so it’s important to work with a legal professional who has experience navigating the laws of your current country of residence.
#3 – Probate
If you own assets in both the United States and your current country of residence, your estate may be subject to probate in both countries. This process can be incredibly time-consuming and expensive for your heirs. It’s vital that you work with a qualified international wealth manager and legal professional to take steps to avoid probate.
#4 – Additional challenges
In addition to the major complexities noted above, it’s wise to take steps to navigate the following estate planning challenges:
- Worldwide asset location and documentation – Take time to locate and document all your assets across multiple countries. Doing so can save your loved ones significant time and effort in tracking down your worldwide assets.
- Language barriers – If you live in a non-English-speaking country, it may be worth your time to maintain documentation in both English and your current country’s language. Doing so can help streamline the distribution of assets following your death.
- Currency fluctuations – The overall value of your estate can vary widely based on currency fluctuations, leading to unintended tax consequences. Your international wealth manager can implement strategies to help you mitigate the risk of currency fluctuations and improve the tax efficiency of your estate.
- U.S. IRS transfer certificate –If you pass away while living abroad, the custodian holding your assets will likely require a U.S. IRS transfer certificate before distributing any non-retirement assets to your heirs. This certificate serves as confirmation that the estate doesn’t have any U.S. estate tax liabilities. Although the process is typically estimated to take nine months, we advise our clients to plan for 18 months in case of delays.
The U.S. IRS transfer certificate can only be created after an individual’s passing, as it requires an official death certificate issued in the current country of residence. Although this task will fall to your heirs, you can speed up the process by ensuring your estate is properly structured with the necessary wills, trusts, beneficiary designations, powers of attorney, etc.
Could you use help updating your wealth transfer strategy while living overseas? Creative Planning International is here for you. We specialize in helping U.S. expats and cross-border families maximize their wealth and avoid costly mistakes. We understand the complex interactions of multi-jurisdictional tax and regulatory regimes and help clients develop operationally and financially efficient retirement and wealth management strategies. Because we serve in a fiduciary capacity, you can be confident we’re acting solely in your best interests.
