As well as U.S. expats having many burdens when it comes to investing their money, another aspect that expats need to get right is estate planning. Now, IHT tax is still applicable for U.S expats in 2021 and is currently set at $11.7 Million for a single individual and $23.4 for a couple. This has changed a lot of planning for HNWs in terms of planning in the U.S. and for U.S. expats offshore.
This will affect an estimated 2000 individuals paying estate taxes.
Although, this is a small amount of personnel subject to U.S. estate tax. If you are moving abroad local estate laws might come into play. For example, the U.K. base rate for IHT is 325,000 GBP that is significantly less than the U.S. and when you move abroad it can bring in new complications.
What is also worth keeping an eye on is the future implications. For example, 20 years ago, who thought that the U.S would impose a citizenship-based taxation system. Meanwhile, the U.S. sees itself having to make up a massive deficit with monetary policy all but out the window.
One way to do this would be to bring down the estate tax, it has proposed to drop the tax to half inflation-adjusted by 2025. So, it could have around $6 million for a single person and $12 million for a couple. Therefore, bringing more US citizens into the estate bracket level.
Aspects to Look Out For When Estate Planning
Here are some aspects to look for from estate planning as a U.S. expat.
Look, at where your assets are based. It might be in the U.S. or where you are currently based as a resident. If you own assets aboard it can impact your tax liabilities and will depend, on the estate tax treaty between the U.S. and your country of residence.
The U.S. presently has estate tax treaties with 15 countries, please see a specialistic tax advisor on this aspect.
Also, if you a married to a non-U.S. citizen, what local laws do they have around estate taxes, IHT, and gift taxes? And if you have any specific spouse taxes in the country of residence. As this varies for each individual feel free to get in touch and can aim to forward you on to the relevant person.
Moving on to the next topic, Wills. This needs to be set up so it works in the U.S. and your new country of residence and if you have assets in different locations and/or looking to retire/live abroad on a permanent basis.
The U.S. way of transferring assets is known as probate and this is not the way that every country operates and the legislation in the country of residence in regards to transferring assets after transfer may differ.
Although, you might have options with the various ways around this. One is setting up a separate Will for the assets you have in the country of residence. While, places such as the E.U., have regulation 650/2012 which allows E.U., residences to select their home countries laws to govern probate of your assets. This will mostly require a new Will due to special E.U. provision and U.S probate law must be specified. So, again see a specialist in the country of residence.
Trusts, if you have a trust in the U.S. you need to be aware of the implications and how/if the trust is actually valid in your country. For example, U.S. based trusts that have taken withdrawals can be taxed in both countries. This can make distributions taxed at 50% or higher. Plus, if you are classified as a non-U.S. resident it can be subject to exit taxes, thus imposing taxes on potential unrealised gains.
When looking at options where you are a resident (depending on your circumstances and how they are taxed from a local and U.S perspective) optimising gifting or other U.S. based tax efferent options might be an alternative option.
Trusts in your local country will most likely be taxed by the U.S. IRS as a foreign trust by U.S. citizen with a U.S. beneficiary. The IRS imposes punitive taxation. U.S. beneficiaries will have to reinstate taxes over several years and in each year they receive a distribution they will pay ordinary income tax instead of capital gain rates (or return of capital, which would be untaxed in a domestic trust) on portions of each distribution and interest and penalties for the portions deemed to be deferrals of income from prior years for good measure.
As well as this if you gift instead of using a trust, where the giftor is located and where the gift is coming from may have different implications in regards to tax on the trust. For example, in the U.K. a giftor can gift 3000 GBP while the U.S. is $15,000 a year.
So where you are located and where you gifting from impacts these options on how much you can gift. Although, I have written a number of other articles for different options such as education planning for U.S. expats and trust options.
In short, this can’t be too specific as it varies for each individual depending on the country you are based in and how assets are structured with the implications for tax and inheritance.
The Implications of Inheriting or Receiving Gifts While Living Abroad
While the United States taxes the donor of a gift or the decedent’s estate, in most foreign countries that tax these wealth transfers, it is the recipient of the gift or inheritance that is taxed. This simple difference in legal cultures may have extremely profound consequences for the U.S. expat who receives a gift or bequest from a parent or other family member. Will property located outside of the residence country of the expat actually subject the expat to local taxation upon receiving it through a gift or inheritance? The answer varies not only from country to country but, in certain cases (e.g., Spain or Switzerland) may even vary depending on the region (e.g., province or canton) in which the expat resides!
The implications described here are far-reaching and the key takeaway is that the expat must not only be mindful of their own estate plan before moving abroad but also the estate plan of those family members from whom they are likely to receive or inherit wealth in the future. Besides the potential tax exposures from direct gifts or inheritances, there may again be negative consequences flowing from the expat’s present or future interest in a family trust. The expat’s own trust may not travel well, but it’s not only their own trust that an expat needs to consider.
If you have any questions surrounding estate planning as a US expat or want to set something up so that you know you have the right structure in place, please email me at info@investmentsforexpats.com.
