Introduction

For those with a pile of money and ties all over the globe, figuring out what happens to their stuff when they’re gone can get pretty tangled. U.S. tax laws play tag with the tax rules of other lands, making it important to think hard about where home is, where the treasure chest is buried, and if any special deals on taxes are in place. This maze might seem daunting, but it’s worth the effort to sort it all out. There are surprising twists and turns when tax surprises come knocking, and a little know-how can go a long way. Dive in to see what gems you could discover and dodge any unexpected hurdles.

This guide offers a detailed look at estate planning in the United States for people with assets in more than one country. It will cover important topics and strategies for those dealing with international estates. We will go over the U.S. tax system for estates, explore different planning methods, and explain what you need to do to comply with the rules. The goal is to help you make smart choices about your international estate plan.

An Overview of the U.S. Estate Tax

This part will explain the main things you need to know about the U.S. estate tax system when you’re dealing with international estate planning.

Fundamental Principles of U.S. Estate Tax

The U.S. taxes the worldwide assets of its citizens and those who are considered residents for tax purposes. Someone is considered a U.S. resident for estate tax if they are “domiciled” in the United States. In 2024, the combined estate and gift tax credit allows a $13.61 million exemption for U.S. citizens and residents. However, for people who are not U.S. residents for estate tax purposes, only their U.S. assets are subject to U.S. estate tax. These U.S. assets include:

• Property like land and buildings in the U.S.
• Physical possessions located within the U.S.
• Certain financial assets, such as shares in U.S. companies.

For non-U.S. residents, there is a smaller tax credit, which equates to a $60,000 exemption. When assets are transferred to a U.S. citizen spouse, no U.S. estate tax applies. However, if assets go to a spouse who is not a U.S. citizen, U.S. estate tax will apply, unless the assets are transferred into a specific type of trust called a Qualifying Domestic Trust (QDOT).

Understanding Domicile and Residency for Estate Tax

The United States uses different rules to decide who is subject to its income tax versus its estate, gift, and generation-skipping transfer (GST) taxes. Income tax is based on where someone lives (their residency), while the other taxes are based on where someone is considered to be permanently based (their domicile). It’s possible for someone to be subject to U.S. income tax but not the other taxes if their permanent home is still in another country. According to U.S. tax rules, for estate tax purposes, a resident is someone who was domiciled in the U.S. when they passed away. To establish domicile in a place, someone must live there, even if only briefly, without a clear plan to leave. Living in a place without the intention to stay permanently is not enough to establish domicile, and likewise, intending to change your domicile is not sufficient unless you actually move.

How Situs Rules Affect Non-U.S. Individuals

For people who are not U.S. citizens or residents, “situs” is very important when figuring out their estate tax obligations. Situs is the legal location of property. While U.S. citizens and residents pay federal estate tax on all their assets, no matter where they are, non-residents only pay federal estate tax on assets located in the U.S. Generally, if a physical asset is located in the U.S., it’s subject to federal estate tax. However, the rules for intangible assets (things you can’t touch, like investments) are more complicated. For instance, something might not be considered a U.S. asset for gift tax purposes but be considered a U.S. asset for estate tax purposes. Here are the basic rules for non-residents and U.S. estate tax:

• Real Estate: Land, buildings, and any permanent fixtures or improvements located in the U.S. are considered U.S. assets.
• Physical Possessions: Any tangible items physically located within the U.S. are considered U.S. assets, including cash.
• Intangible Assets: The location of intangible assets depends on the type of investment. For example, money used in a U.S. business and held in a bank or brokerage (even a U.S. branch of a foreign bank) is considered a U.S. asset. However, personal investment funds, such as checking or savings accounts, retirement plans, stocks, bonds, life insurance, and annuities, have different situs rules based on their specific details and how they relate to the U.S.

Understanding these situs rules is especially important for families who have connections to the U.S. but also include non-U.S. individuals, such as an American living abroad who is married to someone from another country, or for those who are not U.S. citizens but have investments in the U.S.longings.

Important Estate Planning Strategies for International Individuals

Utilizing Foreign Grantor Trusts

Foreign grantor trusts can be a useful way for non-U.S. individuals to manage their assets and potentially reduce their U.S. estate tax liability. These trusts are created under the laws of a country other than the U.S. and must follow the rules of that country. A major benefit of these trusts is that, generally, assets held within them are not subject to U.S. estate tax, provided the person creating the trust is not a U.S. resident for estate tax purposes. This is very advantageous for people with assets outside of the U.S.

However, there are some important things to consider when using these trusts. For example, if the person who created the trust later becomes a U.S. resident for estate tax purposes, the assets in the trust might then become subject to U.S. estate tax. Furthermore, when money is distributed from the trust to people living in the U.S., that money may be subject to U.S. income tax. Therefore, it’s essential to carefully set up and manage these trusts to make sure they comply with both U.S. and foreign tax laws.

Understanding Qualified Domestic Trusts (QDOTs)

A Qualified Domestic Trust, or QDOT, is a special type of trust that is used when a U.S. citizen is married to someone who is not a U.S. citizen. Usually, married couples can freely transfer assets to each other during their lives or after death without any gift or estate taxes. However, this unlimited allowance does not apply when the surviving spouse is not a U.S. citizen.

A QDOT allows a U.S. citizen to leave assets to their non-citizen spouse through a trust that still qualifies for the marital deduction. This means that the estate tax is delayed until the death of the surviving spouse. To qualify as a QDOT, the trust must meet certain requirements, such as having at least one trustee who is a U.S. citizen and following specific rules for distributions. When the surviving spouse takes money from the QDOT (specifically principal) during their lifetime, this will be subject to estate tax, as will any remaining assets in the trust when they pass away.

How Life Insurance Can Be Used in Estate Planning

Life insurance is a very useful tool in international estate planning, especially for people with significant wealth. For U.S. citizens or residents, any money paid out from a life insurance policy is usually included in their taxable estate. However, by using a specific type of trust called an Irrevocable Life Insurance Trust (ILIT), it’s possible to keep the policy proceeds out of the estate. An ILIT is a trust that cannot be changed and it owns and manages the life insurance policy, making sure the death benefit goes directly to the beneficiaries, instead of being part of the estate.

For those who are not U.S. citizens or residents, life insurance money usually isn’t subject to U.S. estate tax, unless the policy was issued by a U.S. insurance company and some other specific situations apply. Life insurance can be very useful for providing cash to an estate, covering possible estate tax debts, or creating an inheritance for family members. The best type of life insurance and how it’s owned should be carefully selected based on each person’s specific situation and objectives.

Things to Think About When Dealing With Multiple Countries

Tax Treaty Considerations

The United States has tax treaties related to estates with fifteen other countries. These agreements can have a big impact on how people plan their estates when they have connections to multiple countries. For instance, a treaty can decide which country has the main right to tax certain assets or allow a credit for taxes paid in one country to be used against taxes owed in another. As an example, if a U.S. citizen living in France passes away, the estate tax treaty between the U.S. and France will help determine how their estate is taxed in both countries. This can potentially reduce or avoid the issue of being taxed twice on the same assets.

Using Foreign Tax Credits

Even if there isn’t a tax treaty in place, the U.S. does offer a foreign tax credit to help avoid double taxation on estates. This credit allows U.S. citizens and residents to use estate taxes they’ve paid to a foreign country to reduce the amount of U.S. estate tax they owe. However, working out this credit can be complicated and depends on several things, such as the type of asset and the specific tax laws of the foreign country.

Expatriation and Exit Tax Rules

The U.S. has particular tax rules for individuals who choose to give up their U.S. citizenship or their long-term residency status. This is often called “expatriation.” If someone meets specific conditions, such as having a large amount of assets or a big U.S. tax liability, they might have to pay an “exit tax.” This tax treats the person as if they had sold all their assets worldwide the day before they gave up their status. This can lead to a significant tax bill. For example, if someone who has been a long-term U.S. resident with assets worth $3 million decides to give up their green card and return to their home country, they could be required to pay the exit tax on the assets, as if they were all sold.

Compliance and Reporting Requirements

Dealing with the U.S. tax system can be tricky, particularly for people who have connections to other countries. It’s very important to understand the rules and reporting requirements to avoid penalties and make sure the estate is handled smoothly. This part will cover the key reporting responsibilities for non-residents and U.S. individuals involved in international estate planning.

U.S. Gift Tax Reporting for Non-Residents

Individuals who are not U.S. residents and who gift U.S. assets may have to report these gifts for U.S. tax purposes. Usually, gifts of up to $18,000 per year to each person are not included, but any gifts above this limit might need to be reported by filing a gift tax return. For example, if someone who does not live in the U.S. gives a U.S. property worth $200,000 to their child, they would have to report this gift to the IRS.

Reporting Foreign Accounts (FBAR and FATCA)

U.S. individuals who have financial accounts or assets in other countries must follow specific reporting rules, mainly through the Foreign Bank Account Report (FBAR) and the Foreign Account Tax Compliance Act (FATCA). The FBAR requires people to report any foreign accounts that had a total value of over $10,000 at any time during the year. FATCA, however, focuses on reporting foreign financial assets, including accounts, investments, and trusts. These reporting rules are intended to increase transparency and prevent U.S. citizens from evading taxes by keeping assets in other countries.

Conclusion

Planning an estate across different countries is complicated and needs careful thought about many things, such as where you live, where your assets are located, tax treaties, and any tax credits available. The U.S. estate tax system, with its extensive reach and specific rules for those who are not U.S. residents, makes things even more complex.

For people with connections to multiple countries, it is very important to get help from experienced legal and tax professionals. A properly structured estate plan, created specifically for your situation and considering all the international factors, can help reduce potential tax issues and ensure your assets are passed on to your chosen beneficiaries as intended.

Frequently Asked Questions